Oil Trading Above $70: Play the Surge With Leveraged ETFs
Oil price has been enjoying smooth sailing lately with U.S. crude topping the $70-per-barrel mark for the first time since November 2014. With the surge, crude has climbed 16% so far this year while Brent is up around 13%. The rally was driven by several factors that are pointing to a rebalancing of the oil market and infusing optimism among investors (read: Energy ETFs Rally: Will the Gains Last?).
Inside The Surge
The first and foremost reason is the historic output cut deal, wherein OPEC, Russia and other producers have agreed to curb production that is paying off amid rising U.S. production. Secondly, speculation that the United States could renew sanctions against the major Middle East oil producer Iran has pushed oil price higher. Notably, President Donald Trump is seeking to restore sanctions on Iran, which were eased after an agreement over its disputed nuclear program, by May 12. If re-imposed, it would likely reduce Iranian oil exports, further tightening excess global supplies.
Additionally, falling production in Venezuela, where output has been halved since 2005 to below 2 million barrels per day due to an economic crisis, will continue to support oil price. On the other hand, accelerating economic growth across the world is raising demand for the commodity despite the greenback gaining some strength lately.
Adding to the strength is the positive roll yield in the futures market. This is because the oil market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity (read: How To Play Oils Surge With ETFs).
The combination of all these factors has increased the appeal for oil, fueling a rally in the energy space.
How to Play?
Amid the strong optimism, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy or oil could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.
Below, we have highlighted several leveraged ETFs and the key differences between them:
ProShares Ultra Oil & Gas ETF DIG
This ETF seeks to deliver twice (2x or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $125.6 million in its asset base and trades in a good volume of about 104,000 shares per day on average. DIG charges 95 bps in fees per year and gained 20.5% over the past one month (see: all the Leveraged Equity ETFs here).
Direxion Daily Energy Bull & 3x Shares ERX
This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $459.8 million and average trading volume of around 2.2 million shares. ERX has surged 30.2% in the same time frame (read: 5 Leveraged ETFs That Soared More Than 20% in April).
Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares GUSH
This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $127 million in its asset base and average daily volume is solid at around 1.2 million shares. Expense ratio comes in at 0.95% and the ETF is up 46.4% over the past one month.
ProShares Ultra Bloomberg Crude Oil ETF UCO
This fund provides a leveraged play to the crude oil segment of the commodities market. It seeks to deliver twice the returns of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $440.3 million in AUM and trades in heavy volume of about 3 million shares a day on average. Expense ratio comes in at 0.95% (read: Why to Consider Leveraged Oil ETFs Now).
VelocityShares 3x Long Crude Oil ETN UWT
This targets the energy commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $168.6 million in its asset base. The ETN trades in heavy volumes of round 3 million shares a day, though it charges a higher fee of 1.50% per year. UWT has surged 40.9% over the past month.
ProShares UltraPro 3x Crude Oil ETF OILU
This ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $17 million in its asset base and trades in solid average volume of 152,000 shares. It charges investors 95 bps in annual fees and expenses, and gained 41.6% in the same time frame (read: Top-Performing Leveraged/Inverse ETFs of Q1).
UBS ETRACS ProShares Daily 3x Long Crude ETN WTIU
With AUM of $14.4 million, WTIU also delivers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex ER. It has an expense ratio of 1.45% and trades in average daily volume of $14.4 million shares. The note was up 42.4% in the past month.
United States 3x Oil Fund USOU
This fund provided three times the daily price movements of WTI oil, charging investors 1.00% in expense ratio. It has accumulated $6.7 million in its asset base and trades in a paltry volume of 2,000 shares a day. The ETF has returned 28.1% over the past month.
Bottom Line
As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.
Still, for ETF investors who are bullish on the energy sector or the commodity oil for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the trend is the friend in this corner of the investing world.
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DIR-EGY BULL 3X (ERX): ETF Research Reports
PRO-ULT BB CRUD (UCO): ETF Research Reports
DIRX-D SP OG BL (GUSH): ETF Research Reports
PRO-ULT OIL&GAS (DIG): ETF Research Reports
VS-3X LG CR OIL (UWT): ETF Research Reports
E-TRC PRS D3XLC (WTIU): ETF Research Reports
PRO-SH UP 3XCO (OILU): ETF Research Reports
USCF-3X OIL (USOU): ETF Research Reports
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