Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) linked to oil and natural gas are among the most popular traded commodities in the stock market.
Inverse ETFs Linked to Oil and Gas
Inverse ETFs linked to oil and gas and exchange-traded notes are a way to establish short positions (i.e., selling a stock or borrowed share) in these petroleum commodities by purchasing one product traded in the market.
Short positions are a way to bet on a market decline. This is how these two instruments work:
- Inverse ETFs: They use different types of futures contracts to replicate the inverse performance of the underlying index. Their stock prices generally correspond to the net asset value owned.
- Inverse exchange-traded notes: Unsecured debt instruments aimed at providing inverse performance to the underlying index. At maturity, if the index it tracks decreases by 2%, the inverse exchange-traded note will generate a 2% gain.
You can make money from inverse ETFs and inverse exchange-traded notes by selling them at a higher price than the purchase price. Market prices for inverse exchange-traded notes are partially determined by the performance of the underlying index. They are also affected by the issuer’s creditworthiness.
You can use these inverse exchange-traded financial instruments to track the inverse of another underlying index or a different set of investments if you believe their value will decline. You can also hedge the risks associated with similar assets you hold when you are in a long position.
Inverse exchange-traded notes aim to achieve the inverse of the underlying index. Additionally, there are also leveraged inverse financial instruments designed to provide inverse performance at two to three times that of the underlying index.
It is worth noting that these products can be extremely risky, as leveraged and inverse products seek to achieve daily investment results. The underlying index can decline in a single day, allowing investors to achieve significant profits using a 2x leveraged inverse ETF. The index may increase more than it declined the next day, resulting in the investor losing double the percentage of those profits.
Short-Term Investments with Higher Expenses
The values of inverse ETFs linked to oil and gas and their associated exchange-traded notes are typically recalculated daily, along with the financial instruments that constitute them. Due to the complex balance involved in rebalancing, these financial instruments linked to oil and gas may not reflect the intended inverse performance of the index after that specific day.
As a result, it is generally not advisable to purchase these instruments 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, or associated exchange-traded notes.
Moreover, due to the frequent buying and selling of the underlying derivatives, inverse exchange-traded notes usually have higher cost ratios than those associated with other financial instruments.
Inverse ETFs Linked to Oil and Natural Gas
Here are some inverse ETFs linked to oil and gas and their associated exchange-traded notes that you may be interested in adding to your portfolio. You should exercise caution and stick to your risk tolerance. Conduct thorough research before investing in these types of products.
Inverse ETFs Linked to Oil and Gas:
- BOIL: ProShares Ultra Bloomberg Natural Gas ETF (2x)
- DIG: ProShares Ultra Oil & Gas ETF (2x)
- ERX:
- 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)
Inverse Exchange-Traded Funds:
- 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, investment, or financial services advice. The information is provided without regard to the investment objectives or risk tolerance or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
Source: https://www.thebalancemoney.com/list-of-leveraged-oil-etfs-1214769
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