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Play the Rising Energy Sector With These Leveraged ETFs

Oil price has been on a tear with Brent hitting the highest level since October 2018 and heading toward $80 per barrel while WTI jumped to $75 per barrel — the highest since July. The rally has been driven by supply disruptions and storage drawdowns as well as growing demand with the easing of pandemic restrictions.

Inventories have declined sharply in the United States and abroad due to disruptions that could last for months. Oil drillers in the Gulf of Mexico are still struggling to restore output more than two weeks after Hurricane Ida made landfall on the coast of Louisiana, with almost a third of production still idled. Meanwhile, some members of the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, are struggling to raise the output following under-investment or delays in maintenance work due to COVID-19 (read: ETFs to Win & Lose From Higher Oil Price).

Added to the strength is growing fuel demand. Overall demand for fuel has rebounded to pre-pandemic levels. With new vaccination mandates to control the rising Delta variant of COVID-19, demand is poised to increase. OPEC+ in its latest monthly report forecasts oil demand to grow by 4.15 million barrels per day in 2022, up from the previous forecast of 3.28 million barrels per day. It also expects demand to reach 100.83 million barrels per day for the year, driven by a stronger-than-expected recovery in fuel demand and a steady economic outlook in all regions. The OPEC monthly report further states that the world will continue to face a supply deficit in the coming months even as OPEC nations revive idle production.

Given the demand and supply imbalances, oil price has shown strength since late August. The solid trend is likely to continue with major Wall Street banks being bullish on the commodity at least for the short term. Goldman Sachs Group (GS) raised its Brent oil forecast to $90 per barrel from $80 per barrel by the end of the year. Bank of America Corp. estimates that a colder-than-expected winter could push prices up toward $100 at some point early next year.

How to Play?

Amid the strong optimism and rising oil price, the energy sector looks attractive. Many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy 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 the leveraged ETFs that could be excellent picks:

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 $180.5 million in its asset base and trades in a good volume of about 65,000 shares per day on average. DIG charges 95 bps in fees per year and has gained about 81.4% this year.

Direxion Daily Energy Bull 2X Shares ERX

This fund creates two times leveraged 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 $505.4 million and an average trading volume of around 3.4 million shares. ERX has surged 77.5% so far this year (read: Is This the Time for Crude Oil & Energy ETFs?).

Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares GUSH

This fund offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $808.4 million in its asset base and the average daily volume is solid at around 2.2 million shares. The ETF charges 95 bps in annual fees and has gained 119.8% this year.

MicroSectors U.S. Big Oil Index 3X Leveraged ETN NRGU

This ETN provides three times 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. It has been able to manage $438.9 million in its asset base while trading in an average daily volume of 377,000 shares. Expense ratio comes in at 0.95%. The fund has skyrocketed 117.2% this year.

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 Oil & Gas (DIG): ETF Research Reports
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU): ETF Research Reports
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