Pick Leveraged ETFs to Tap Surging Oil Prices
Oil has been surging in recent months due to geopolitical tensions in the Middle East and Ukraine, tightening supply conditions, and the prospect of higher demand. The global benchmark Brent climbed above $91 last week to near the highest level since October, while U.S. crude rose closer to $87. Both benchmarks logged in the second weekly gain with more upside potential.
Given this, investors could tap the bullish trend in the sector with the help of leveraged ETFs to make quick profits, as these could see huge gains in a very short time frame compared to simple products. These are ProShares Ultra Oil & Gas ETF DIG, Direxion Daily Energy Bull 2X Shares ERX, Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares GUSH, MicroSectors U.S. Big Oil Index 3X Leveraged ETN NRGU and MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN OILU.
Solid Trends
Tensions in the Middle East have escalated following the airstrike on Iran's embassy compound in Syria, which killed several individuals, including two generals. Iran has vowed a "decisive response" to the attack, sparking fears of a wider regional conflict. Meanwhile, a report showed that Russia may have temporarily lost as much as 15% of its refining capacity because of Ukrainian drone attacks. The escalating tensions have led to a spike in oil prices.
Additionally, buyers from Europe and Asia are increasingly purchasing U.S. crude, driven by concerns over importing Russian and Venezuela oil amid sanctions against Russia and the unpredictable status of sanctions relief for Venezuela. Further, the oil cartel OPEC+ extended the voluntary output reductions of 2.2 million barrels per day until the second quarter (read: 4 Reasons Why Oil & Energy ETFs Can Continue to Soar).
Meanwhile, the demand for oil is improving. The IEA has revised its 2024 oil demand outlook upward for the fourth time since November, citing disruptions in Red Sea shipping due to Houthi attacks. The forecast indicates an increase in global demand by 110,000 bpd from the previous projection to 1.3 million bpd. The improved forecast came from signs of economic growth in China and the United States. Notably, manufacturing activity in China expanded for the first time in six months in March, bolstering oil demand in the world's largest importer of crude. In the United States, manufacturing activity unexpectedly expanded in March for the first time since September 2022.
Oil is also gaining support from declining crude exports from Saudi Arabia and Iraq. Further, the prospect of rate cuts this year by the Fed is driving oil prices. Lower interest rates tend to lower the expenses of purchasing goods and services, potentially stimulating economic expansion and driving oil demand.
Here, we have profiled the abovementioned ETFs:
ProShares Ultra Oil & Gas ETF (DIG)
ProShares Ultra Oil & Gas ETF seeks to deliver twice (2X or 200%) the daily performance of the S&P Energy Select Sector Index. It has been able to manage $126 million in its asset base and trades in a good volume of about 70,000 shares per day on average. DIG charges 95 bps in fees per year.
Direxion Daily Energy Bull 2X Shares (ERX)
Direxion Daily Energy Bull 2X Shares creates two times leveraged position in the Energy Select Sector Index, while charging 92 bps in fees a year. Direxion Daily Energy Bull 2X Shares is a popular and liquid option in the energy leveraged space with AUM of $430.4 million and an average trading volume of around 608,000 shares.
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH)
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $551.8 million in its asset base and the average daily volume is solid at around 789,000 shares. Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares charges 93 bps in annual fees (read: ETFs to Gain & Lose From Higher Oil Price).
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU)
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies. MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $2.6 billion in its asset base while trading in an average daily volume of 43,000 shares. Its expense ratio is 0.95%.
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU)
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN is linked to three times leveraged performance of the MicroSectors Oil & Gas Exploration & Production Index. The index provides exposure to the large-capitalization companies that are domiciled and listed in the United States and active in the exploration and production of oil and gas. MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN has amassed $76.5 million in its asset base and trades in a lower average volume of 129,000 million shares. It charges investors 95 bps in annual fees and expenses.
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 (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the energy sector 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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Direxion Daily Energy Bull 2X Shares (ERX): ETF Research Reports
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH): ETF Research Reports
ProShares Ultra Energy (DIG): ETF Research Reports
MicroSectors Oil & Gas E&P 3X Leveraged ETNs (OILU): ETF Research Reports
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU): ETF Research Reports