Things haven’t been so rosy for the energy patch these days.
During the past six months, crude oil prices have plunged by more than 60%. Just last week, crude managed to record the single-largest weekly decline since the 1980s. And OPEC surprised everyone by keeping production steady while oil demand continues to fall.
And supplies continue to rise. Stockpilesof crude oil in the U.S. rose by a staggering 5.4 million barrels for the week ending Jan. 9. That’s well above analyst estimates of an increase of just 400,000 barrels. Total inventories of crude came in at 387.8 million barrels — the highest level in at least 80 years. At the same time, demand forecasts have been lowered by roughly 100,000 barrels per day.
And it could get a lot worse for oil prices before it gets better.
But you don’t have to sit around and just wait to finally buy a dip. You can profit off oil even as it heads further into the depths.
A number of exchange-traded funds allow you to make money from the current pain in the energy patch, making them a great hedge for your energy portfolio. So, consider these ETFs to play a continued decline in oil prices.
ETFs to Buy: PowerShares DB Crude Oil Short ETN (SZO)
For investors looking for a relatively easy way to play the potential further decline in oil prices, the PowerShares DB Crude Oil Short ETN (NYSEARCA:SZO) could be a prime choice.
SZO provides the inverse performance of the Deutsche Bank Liquid Commodity Oil sub-index for one day as well as the yield from short-term Treasury bonds. When dealing with futures, investors usually are required to put up some sort of collateral; SZO’s underlying index gives investors the ability to profit from that parked cash.
In short, this ETF gives investors exposure to the opposite of whatever light, sweet crude does for a single day. So theoretically, if crude oil prices fall 1%, SZO will gain 1%. (But with all inverse and leveraged funds, remember that over time, they will track their indices less closely.) Currently, SZO is tracking the February contract for West Texas Intermediate (WTI) crude oil.
SZO has performed wonderfully in the face of oil’s decline; the fund is up by nearly 100% in the past six months. And for such a complex inverse ETF, SZO is surprisingly cheap, charging just 0.75% annually — or $75 per $10,000 invested — in fees.
3 ETFs to Buy: ProShares UltraShort Bloomberg Crude Oil ETF
If you want to profit even more from a decline in oil prices, you’ll need to add some leverage.
The ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA:SCO) is the most popular way to do that.
Like SZO, SCO shorts crude oil. In this case, futures are based on the Bloomberg WTI Crude Oil Sub-index. However, SCO promises two times the inverse daily performance of the index. It does this buying going short various swaps associated with its underlying index’s crude oil futures. That provides extra juice and profits as crude oil falls. SCO has been one of the best-performing ETFs over the past six months.
All in all, SCO has nearly quadrupled since oil began to plunge.
Fair warning: Leverage can cut both ways. If crude oil prices begin to rise, SCO — and anyone holding it — will be in for a world of hurt, even more than ETFs like the previously mentioned SZO.
But in the meantime, SCO could be a great ride if crude oil can’t find a bottom.
Leveraged ETFs aren’t cheap to own, and SCO is no exception. This ProShares fund charges 0.95% in expenses.
3 ETFs to Buy: Direxion Daily Energy Bear 3X ETF (ERY)
As the expression goes, there’s more than one way to skin a cat.
As oil has plunged, so has the shares of the various energy producers, midstream and oil service stocks. The basic idea is that all of these firms will continue to see big time earnings misses, lower profits and even some bankruptcies among smaller players.
That’s where the Direxion Daily Energy Bear 3X ETF (NYSEARCA:ERY) comes in.
ERY offers investors the ability to short the S&P Energy Select Sector Index, with quite a lot of leverage (3x). This index is the same one tracked by the uber-popular Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) and features many of the nation’s top shale players, integrated oil giants and oil service stocks — names like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and Schlumberger Limited (NYSE:SLB). By using ERY, investors can either hedge a long position in energy stocks or simply profit from the sector’s pain throughout the rest of the year.
So far, ERY has been a good bet, with the ETF returning roughly 35% over the past three months.
Again, that leverage can work against you, but ERY does make for an effective short- to medium-term tool to play diving oil prices.
Expenses for ERY run at 0.95%.
As of this writing, Aaron Levitt was long ERY as a hedge and plans to exit the position at some time after oil prices turn positive.