Leveraged and Inverse Oil and Gas ETFs and ETNs
Exchanged-traded funds (ETFs) and exchange-traded notes (ETNs) related to oil and natural gas are some of the most popular types of commodity exchange-traded products (ETPs). Commodity ETPs enable you to hold positions (go long) in commodities—in this case, oil and/or natural gas—by buying a single product that's easily traded on an exchange. These ETPs typically aim to mimic the return of an index of commodities futures contracts, before management fees and other expenses.
Futures are derivatives—financial instruments that derive their value from another instrument or instruments. Futures contracts are agreements to buy or sell a particular asset at a set price on an agreed-upon date.
Other ETPs let you buy a basket of stocks of companies in the oil and/or natural gas business by buying a single product. They seek to match the return of a petroleum industry stock index, before expenses.
Leveraged Oil ETFs and ETNs
Some ETPs are leveraged, which means they attempt to return, on a daily basis, a multiple of the return of their benchmark. For example, the Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 2X Shares ETF (GUSH) seeks to return 200% of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index each day.
Leveraged ETPs can provide outsized returns, but they also involve outsized risk. It's possible to quickly lose the entire value of your investment.
Inverse Oil ETFs and ETNs
Inverse oil and/or natural gas ETFs and ETNs are ways to create short positions in those petroleum commodities by buying a single product that's traded on an exchange. The short position (generally taken when you sell borrowed amounts of a tradable entity with the intention of buying them back for a lower price) is a way of betting on a drop in a market. Here's how these two ETPs work:
- Inverse ETFs: Typically use various types of futures contracts to mimic the opposite performance of their underlying benchmark. Their share prices generally correlate to the net asset value of their holdings.
- Inverse ETNs: Unsecured debt securities that aim to provide the opposite performance of their underlying benchmark. At maturity, they will pay the opposite of the return of the benchmark they track.
You can also make money from them—and from inverse ETFs—by selling them at a higher price than the one you bought them at. Inverse ETNs' market prices are determined in part by the performance of the underlying index and are also affected by the perceived creditworthiness of their issuer.
You can use these inverse ETPs to inversely track an underlying index or another grouping of investments if you believe its value will fall or to hedge against downside risk in similar investments you own, when in a long position.
While inverse ETPs aim to return the opposite of the underlying benchmark, there are also leveraged inverse ETPs that aim to provide the opposite performance of that underlying benchmark at two or three times the return.
These products can be very risky because leveraged and inverse products seek daily investment results. While the underlying benchmark could drop one day, allowing an investor to profit greatly with a 2x leveraged inverse ETF, it could increase the next, causing the same investor to lose those profits.
Short-Term Investments With Higher Expenses
The values of leveraged and inverse ETFs and ETNs are typically recalculated every day along with the financial instruments that make them up. Because of the complicated rebalancing involved, these ETPs may not be able to accurately reflect the intended opposite performance of their benchmark beyond that particular day. And as a result, they are generally not recommended as long-term investments. In fact, on Jan. 22, 2019, Vanguard, the second-largest provider of ETFs in the world, stopped accepting new investments in leveraged or inverse ETFs, ETNs, or mutual funds.
In addition, because of the frequent buying and selling of their underlying derivatives, inverse ETPs usually have higher expense ratios than those of other ETPs.
Leveraged Oil and Natural Gas ETPs
Below are several leveraged and inverse oil and natural gas ETFs and ETNs that investors may be interested in adding to their portfolios. Investors are urged to take caution, understand their risk tolerance, do thorough research before investing in these types of products.
- BOIL: ProShares Ultra Bloomberg Natural Gas ETF (2x)
- DIG: ProShares Ultra Oil & Gas ETF (2x)
- ERX: Direxion Daily Energy Bull and Bear 2X Shares ETF (2x)
- GUSH: Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 2X Shares ETF (2x)
- NRGO: MicroSectors U.S. Big Oil Index 2X Leveraged ETN (2x)
- NRGU: MicroSectors U.S. Big Oil Index 3X Leveraged ETN (3x)
- UCO: ProShares Ultra Bloomberg Crude Oil ETF (2x)
- UGAZ: VelocityShares 3x Long Natural Gas ETN (3x)
- DDG: ProShares Short Oil & Gas ETF (-1x)
- DGAZ: VelocityShares 3x Inverse Natural Gas ETN (-3x)
- DRIP: Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 2X Shares ETF (-2x)
- DUG: ProShares UltraShort Oil & Gas ETF (-2x)
- ERY: Direxion Daily Energy Bull and Bear 2X Shares ETF (-2x)
- KOLD: ProShares UltraShort Bloomberg Natural Gas ETF (-2x)
- NRGD: MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (-3x)
- NRGZ: MicroSectors U.S. Big Oil Index -2X Inverse Leveraged ETN (-2x)
- SCO: ProShares UltraShort Bloomberg Crude Oil ETF (-2x)
- YGRN: MicroSectors U.S. Big Oil Index Inverse ETN (-1x)
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Direxion. "Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 2X Shares." Accessed April 28, 2020.
FINRA. "Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors." Accessed April 28, 2020.
Vanguard. "Important Information About Leveraged, Inverse, and Commodity Exchange-Traded Products." Accessed April 28, 2020.