By Alex Kimani
The energy selloff began shortly after the COVID-19 outbreak but quickly accelerated after the World Health Organization upgraded its global risk assessment for the coronavirus to “very high” on Friday, giving the bears an upper hand. WTI tumbled 5.8% on Friday’s session;12% for the week and 29% below its 52-week high to trade at $45.88, its lowest level since Jan. 2019.
But in a surprising twist, the bulls appear to be winning again.
U.S. stocks and energy markets have received a much-needed shot in the arm on hopes of a coordinated global fightback against the pandemic after G7 finance ministers agreed to meet on Tuesday.
The energy markets are staging an impressive rally, with WTI trading up at $46.75, while Brent Crude was trading at $52.79 at 17:17 hrs ET on Monday.
Meanwhile, the Dow Jones is up 730 points (2.64%) vs. a 2.4% gain by the S&P 500 Index.
The pullback comes after the markets received an absolute shellacking the previous week, finishing 11.2% lower to conclude the worst week since the 2008 financial crisis.
While the coronavirus pandemic was a proximate cause of the heavy selloff, systematic outflows was a big catalyst with JPMorgan estimating there was around $150 billion in systematic selling pressure on Monday and Tuesday alone.
Yet, analysts are warning not to start doing a victory lap just yet.
Quad Group’s Peter Borish has cautioned investors to be wary of what may appear to be the beginning of a big rebound. That might well apply to the oil and gas markets since the underlying supply/demand imbalances are far from over. While low energy prices have really tightened margins for major players in the sector, the bears have found a silver lining in inversely leveraged energy sector ETFs designed to profit from a decline in oil and natural gas prices.
They say if you can’t beat them, join them, and it’s the bears that have mostly been having any kind of joy in this dire market. Here are three inverse ETFs that have been killing it in the ongoing energy bear.
#1 Direxion Daily Energy Bear 3X Shares (ERY)
Expense Ratio: 1.14%
Source: CNN Money
The Direxion Daily Energy Bear 3X Shares (ERY) seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite), of the performance of the Energy Select Sector Index (XLK). Industry bellwethers Exxon Mobil Corporation and Chevron Corporation account for about 30% of the tracked benchmark, making the fund suitable for those who want a leveraged bet against those names.
ERY features tight bid/ask spreads and daily turnover of 265,000 shares making it a traders’ favorite among the segment. The fund has returned 10.42% in the year-to-date. However, the provider warns that the ETF seeks daily goals and should not be expected to track the underlying index over periods longer than one day.
#2 ProShares Ultrashort Bloomberg Crude Oil (SCO)
Expense Ratio: 0.95%
Source: CNN Money
The ProShares UltraShort Bloomberg Crude Oil (SCO) aims to deliver 2X the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. To achieve its objective, this 12-year-old fund invests its assets in futures and option contracts for light sweet crude oil, making it a handy instrument for oil bears who want a straightforward bet against the commodity
SCO offers a narrow 0.08% spread coupled with an average daily volume of roughly $30 million.
#3 Direxion Daily Natural Gas Related Bear 3X Shares (GASX)
Expense Ratio: 1.31%
Source: CNN Money
Bear, inverse, and clean energy ETFs seem to be the only energy ETFs getting some joy in this market, and GASX is no exception.
For investors who prefer to go with the flow, Direxion Daily Natural Gas Related Bear 3X Shares (NYSEARCA:GASX) could be a great investment given how badly the natural gas market has been performing. GASX seeks to provide daily investment results, net of expenses, of 300% of the inverse of the daily performance of the ISE-Revere Natural Gas Index.
GASX is designed to take advantage of both event-driven news as well as long-term trends in the natural gas industry.
With a juicy nearly 220% return over the first two months of the year alone, natural gas bears have been really killing it with this ETF. By the same token, they could find themselves in trouble if gas prices suddenly reverse course.
That said, investors should bear in mind that Direxion Shares ETFs tend to be more volatile than other more broadly diversified funds. The use of leverage further increases their volatility and risk.
There is obviously no way of foretelling whether the current geo-economic/political picture will remain consistent enough for these bear ETFs to continue delivering healthy returns. However, odds are that the energy sector will remain bear bait in the near-term making these inverse funds a fair bet.
By Anes Alic for Oilprice.com