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 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 other instruments. Futures contracts are agreements to buy or sell a certain asset at a set price on an agreed-upon date.
Other ETPs let you buy a basket of oil and/or gas company stocks 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 use derivatives and debt to multiply the return of the benchmark they mimic. 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 large returns, but they also involve increased risk. You could lose the entire value of your investment in one day.
Inverse Oil ETFs and ETNs
Inverse oil and/or natural gas ETFs and ETNs are ways to create short positions (i.e., sell a borrowed stock or share) in those petroleum commodities by buying a single product that's traded on an exchange.
The short position is a way of betting on a drop in a market. Here's how these two ETPs work:
- Inverse ETFs: 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, if the benchmark they mirror drops 2%, then the inverse ETN would gain 2%.
You can make money from inverse ETFs and ETFs by selling them at a higher price than you bought them for. Inverse ETNs' market prices are determined in part by the performance of the underlying index. They 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. You can also hedge against downside risk in similar assets you own when in a long position.
Inverse ETPs aim to return the opposite of the underlying benchmark. Additionally, there are also leveraged inverse ETPs that aim to provide two to three times the opposite performance of the underlying benchmark.
These products can be very risky, because leveraged and inverse products seek daily investment results. The underlying benchmark could drop one day, allowing an investor to profit greatly with a 2x leveraged inverse ETF. It might also increase more than it dropped the next, causing the same investor to lose a multiple of 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 complex rebalancing involved, these ETPs may not accurately reflect the intended opposite performance of their benchmark beyond that particular day.
As a result, they are generally not recommended as long-term investments. In fact, on January 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 you may be interested in adding to your portfolio. You should take caution and stick to your 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)
- DDG: ProShares Short Oil & Gas ETF (-1x)
- 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 or investment advice or financial services. 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.