Bet on the energy sector with leveraged ETFs
The price of oil has gained momentum of late, with futures showing gains for the second week in a row. US crude hit its highest level since October 2018, while Brent hit its highest level since September 2019. A rapid global economic recovery and reopening of economies coupled with optimism for the US summer season are boosting demand for energy (read: Brent Tops $ 70 Again: ETF Set Win and Lose).
The world’s largest oil-consuming country is in the midst of a recovery in demand with the start of the summer travel season, while other countries are showing strength as well. Gasoline demand in the United States reached its highest level since the start of the pandemic, according to Descartes Labs, while traffic on UK roads was for the first time above pre-pandemic levels . According to Daniel Yergin, vice president of IHS Markit, demand for oil will increase rapidly between the first and third quarters by 7 million barrels per day.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed at their last meeting to continue to gradually ease production cuts. The cartel will ramp up production in July, in line with the group’s April decision to put 2.1 million barrels a day back on the market between May and July. They expect the rebound in global demand to absorb the additional supply despite the prospect of increased production from Iran, if a nuclear deal is revived, and concerns about tightening COVID-related restrictions. 19 in parts of Asia, notably India.
The return of Iranian barrels does not appear to be an imminent problem for the oil market, as talks between the United States and Iran over Tehran’s nuclear program have slowed, lowering expectations of a return of Iranian oil supplies. on the market this year. To the strength is added the decline in stocks. U.S. crude inventories fell 5.1 million barrels in the week ended May 28 from expectations of a 2.4 million barrels drop.
Gasoline inventories are hovering at their lowest level in nearly three decades, while crude inventories at Cushing, WTI’s delivery hub, have fallen about 17% below the five-year average. OPEC expects stocks to decline by at least 2 million barrels per day from September to December.
Rising demand and tightening supply have pushed the price of oil higher. OPEC predicts demand could reach 99.8 million barrels per day by the end of the year, but supply is expected to reach only 97.5 million barrels per day (read: ETFs will gain as oil rallies on optimistic demand prospects).
How to play?
Amid the strong optimism, many investors have become optimistic about the energy sector and are looking to seize this opportunity. For them, a leveraged energy game could be a great idea as they could see huge payoffs in a very short period of time compared to simple products.
Below, we’ve highlighted leveraged ETFs that could be great choices:
ETF ProShares Ultra Oil & Gas
This ETF aims to offer twice (2X or 200%) the daily performance of the Dow Jones US Oil & Gas index. It has been able to manage $ 235.5 million in its asset base and trades a good volume of around 108,000 shares per day on average. DIG charges 95 basis points in fees per year and gained about 13.6% last week.
Direxion Daily Energy Bull 2X shares ERX
This fund creates a double leveraged position in the Energy Select Sector index while charging 95bp fees per year. It is a popular and liquid option in the energy leveraged space with assets under management of $ 707.9 million and an average trading volume of approximately 3.9 million shares. ERX jumped 13.8% in one week (read: 5 energy ETFs at the forefront of the oil rally with more potential).
Direxion Daily S&P Oil and gas exploration and production Bull 2X Actions GUSH
This fund offers exposure that is twice the daily performance of the S&P Oil & Gas Exploration & Production Select Industry index. It has accumulated $ 936.1 million in its asset base and the average daily volume is strong at around 1.8 million shares. The ETF charges 95 basis points for annual fees and has gained 16.7% over the past week.
MicroSectors US Big Oil Index 3X Leveraged ETN NRGU
This ETN offers three times the leveraged exposure of the Solactive MicroSectors US Big Oil Index, which is equally weighted and provides exposure to the 10 largest US energy and oil companies. It was able to manage $ 643.8 million in its asset base while trading an average daily volume of 230,000 shares. The expense ratio is 0.95%. Fund gas added 22.3% over the past week.
As a caveat, investors should note that these products are extremely volatile and only suitable for short-term traders. Additionally, daily rebalancing – when combined with leverage – can cause these products to deviate significantly from expected long-term performance numbers (see: all leveraged equity ETFs here).
Nonetheless, for ETF investors who are bullish on the short-term energy sector, either of the above products may be an attractive choice. Obviously, a long run to a short run might be intriguing for those with a high tolerance for risk and a belief that the trend is friend in this corner of the investing world.
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