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Bet on Energy Sector With Leveraged ETFs

Oil price has gained momentum lately with futures posting gains for the second consecutive week. U.S. crude hit the highest since October 2018 while Brent touched its maximum level since September 2019. A swift global economic recovery and reopening of economies coupled with optimism over the U.S. summer season are spurring demand for energy (read: Brent Tops $70 Again: ETFs Set to Win & Lose).

The world’s largest oil-consuming country is in the midst of a demand revival with the start of the summer travel season, while other countries are also showing strength. U.S. gasoline demand hit the highest since the pandemic began, according to Descartes Labs, while traffic on United Kingdom roads was higher than the pre-pandemic levels for the first time. According to Daniel Yergin, vice chairman of IHS Markit, demand for oil will grow rapidly between the first quarter and the third quarter by 7 million barrels a day.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed at their latest meeting to continue easing production cuts gradually. The cartel will boost output in July, in accordance with the group’s April decision to return 2.1 million barrels per day to the market between May and July. They expect the recovery in global demand to absorb the additional supply despite the prospect of more output from Iran, should a nuclear deal be revived, and concerns over tighter COVID-19 related restrictions across parts of Asia, most notably India.

The return of Iranian barrels does not appear to be an imminent issue for the oil market as talks between the United States and Iran over Tehran's nuclear program has slowed down, reducing expectations for a return of Iranian oil supplies to the market this year. Added to the strength is the decline in inventory. U.S. crude inventories fell by 5.1 million barrels in the week ended May 28 compared with expectations of a decrease of 2.4 million barrels.

Gasoline stockpiles are hovering at the lowest level in almost three decades while crude stockpiles at Cushing, the WTI delivery hub, has fallen some 17% below the five-year average. The OPEC expects stockpiles to decline by at least 2 million barrels a day from September through December.

Bullish demand and tightening supply have been pushing oil price higher. OPEC projects that demand could reach 99.8 million barrels a day by the end of the year, but supply is expected to reach just 97.5 million barrels a day (read: ETFs to Gain as Oil Rallies on Upbeat Demand Outlook).

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 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 $235.5 million in its asset base and trades in a good volume of about 108,000 shares per day on average. DIG charges 95 bps in fees per year and has gained about 13.6% in the past week.

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 $707.9 million and an average trading volume of around 3.9 million shares. ERX has surged 13.8% in a week (read: 5 Energy ETFs at the Forefront of Oil Rally With More Upside).

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 $936.1 million in its asset base and the average daily volume is solid at around 1.8 million shares. The ETF charges 95 bps in annual fees and has gained 16.7% over the past week.

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 $643.8 million in its asset base while trading in an average daily volume of 230,000 shares. Expense ratio comes in at 0.95%. The fund gas added 22.3% over the past week.

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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DIRX-D SP OG BL (GUSH): ETF Research Reports
PRO-ULT OIL&GAS (DIG): ETF Research Reports
DIR-EGY BULL 3X (ERX): ETF Research Reports
MCRO-US BOI3XL (NRGU): ETF Research Reports
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