Oil hit a six-and-half-year low on Wednesday after inventories numbers came in much higher than Wall Street analysts and investors were expecting. While many arguments can be made for why oil will continue to decline or rise in the coming months, the reality is, we just don’t know what is going to happen.
But regardless of how you fell the commodity will perform in the coming months; there is no shortage of ways to make money in the oil market. You could go long or short the commodity itself, go long or short exploration and production giants like Exxon Mobile (XOM) or Chevron (CVX), make a play with smaller oil and gas producers, invest in oil and gas MLP's, the pipelines company's, or even just the equipment suppliers.
In most of these instances though, you will be stuck cherry picking individual company's and trying to figure out which ones are best positioned to benefit from higher oil prices or attempting to determine which ones will be hurt the greatest if oil prices continue to decline. But one way to make this process easier, is to simply buy an ETF that bundles a number of those companies together and either takes a bullish or bearish position on them.
And since oil has recently been falling, let's take a look at a few ETF's that are built to help make you money from declining oil prices.
The first ETF is the ProShares Short Oil & Gas (DDG). Over the last month, DDG is up 6.81%, 15.49% over the last three months, and 29.74% during the last 12 months. This ETF has been in existence since June of 2008. DDG attempts to provide an inverse return of the daily performance of the Dow Jones U.S. Oil & Gas index. This ETF essentially is allowing investors to short the Oil and Gas index. Unlike other ETF's, which we will get to in a moment, this is just a -1x fund, meaning that if the Oil & Gas index falls by 1%, the DDG will be up 1% for the day. But, investors should remember that this is a daily inverse fund since it invests in derivatives, meaning over a long period of time the fund will not likely show exact opposite performance to the Oil & Gas index. DDG carries an annual expense ratio of 0.95% and invests in all areas of the oil and gas industry such as exploration and production, integrated organizations, pipelines, equipment and services, renewable producers as well as those who make components for renewable energy producers.
One of the best performing oil related ETF's over the past month has been ProShares UltraShrt Oil&Gas Explor&Prdtn (SOP)ETF, which is up 36.86% over the last month. The fund has an inception date of June 22, 2015, so longer term performance is non-existent at this time. The SOP is a two times inverse ETF that tracks the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. The funds focused approach on just oil and gas exploration and production companies is likely the case for its higher performance over the last month because those have been the business's most directly impacted by the falling price of oil. SOP carries an annual expense ratio of 0.94%. Lastly, due to its short existence of just over two months and only having net assets of around $3 million, if oil prices begin to move dramatically higher, besides seeing their investment shrink, SOP investors could see the fund close all together.
Over the past year, the best-performing oil and gas ETF has been the Direxion Daily Energy Bear 3X ETF (ERY). ERY is up 10.78% over the past month, 46.66% over last three months, and 84.56% over the last year. The ERY is a 3X leveraged bear ETF that tracks the Energy Select Sector Index and has been trading since November of 2008. Because this is a leveraged ETF, it invests in futures contracts, options, swaps, floors and collars, forward contracts, short positions, and other ETF's just to name a few. Due to the methods the fund uses to replicate the 3X short position in the index, the ERY will not likely produce exact inverse returns to the Energy Select Sector Index for more than a one day period at a time.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held no positions in any of the stocks mentioned in that article at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
