A leveraged ETF magnifies your exposure to an index for the same amount of money. It’s the perfect vehicle to get more exposure for fewer dollars!
The following list covers double long oil ETFs and double short oil ETFs as they are the tools you can use for capitalizing on the volatility of oil prices.
Beware when trading with leveraged oil ETFs as they are suitable for short-term swings or day-trading strategies and not long-term buy and hold. If you’re looking for a non-leveraged ETF to use as a building block in your portfolio for investing and not trading, consider a non-leveraged Oil ETF for your exposure to oil prices.
Double Long Oil ETF 2x
UCO – ProShares Ultra DJ-UBS Crude Oil ETF (NYSEArca: UCO)
Error opening: http://finance.yahoo.com/d/quotes.csv?s=UCO&f=sl1c1j1ya2
MER: 0.95%
UCO is a popular leveraged long ETF that seeks to return (net of expenses) 2x the daily performance of the Dow Jones- UBS Crude Oil Sub-Index. It was first introduced in November 24, 2008 and as you can see from the average trading volume it is highly liquid and excellent for fund for trading oil.
FOL – FactorShares 2X: Oil Bull/S&P500 Bear ETF (NYSEArca: FOL)
Error opening: http://finance.yahoo.com/d/quotes.csv?s=FOL&f=sl1c1j1ya2
MER: 0.75%
FOL is a leveraged spread ETF which holds 2 positions simultaneously:
- A leveraged long oil position in Light Sweet Crude Oil Futures (WTI)
- A leveraged short position in the E-mini S%P 500 Stock Index futures.
Basically, you’re long oil and short stocks at the same time seeking to return 2x the difference between oil and US stocks. This ETF is perfect to play black swan events (sanctions or civil unrest in the MENA region) that jeopardize oil supplies as equity markets react negatively to increased volatility in oil prices.
FOL was introduced on February 24, 2011 and while it boasts a smaller management fee compared to UCO it suffers from lower liquidity. Keep in mind that this double long oil ETF is not a pure play on oil prices because it simultaneously bets against stocks.
YTD 2011 chart UCO vs. FOL
Notice how FOL behaved when the Arab revolutions started spreading like wildfire earlier this year, it outperformed UCO. However, UCO tracked 2x oil prices better than FOL as it does not have an equity component to skew its performance.
Double Short Oil ETF 2x
DTO – PowerShares DB Crude Oil Dble Short ETN (NYSArca: DTO)
Error opening: http://finance.yahoo.com/d/quotes.csv?s=DTO&f=sl1c1j1ya2
MER: 0.75%
Let’s start with mentioning that DTO is double short oil ETN not ETF. ETFs are always preferred to ETNs because if the issuer collapses, investors would not lose it all (Lehman Brothers anyone?). DTO inversely replicates 200% of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Oil Excess. You’re basically double shorting an index which holds futures contracts on light sweet crude oil (WTI). While the management fee is lower than SCO and trades with a decent volume, SCO is still the preferred double short oil ETF as it is simply more liquid. DTO was first launched on June 16, 2008.
SCO – ProShares UltraShort DJ-UBS Crude Oil ETF (NYSArca: SCO)
Error opening: http://finance.yahoo.com/d/quotes.csv?s=SCO&f=sl1c1j1ya2
MER: 0.95%
SCO is the most actively traded double short Oil ETF. It was first introduced on November 24, 2008. This is a trader’s preferred tool to short the Dow Jones—UBS Crude Oil Sub-Index (a sub-index of DJ—UBS Commodity Index) which consists of futures contracts on crude oil (WTI). SCO returns investment results corresponding to 200% the opposite of the daily index performance.
2011 YTD chart SCO vs. DTO
The performance is pretty close between SCO and DTO. Even though DTO has a higher asset value, SCO has the liquidity advantage that is so important for short term trades.
A word of caution, please remember that trading leveraged ETFs has its risks and could cost you a lot of money in losses if you don’t know what you’re doing.
Disclaimer: The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Trading involves substantial risk and may not be right for everyone.