As has been widely documented this year, oil prices are slumping and the energy sector is the worst-performing group in the S&P 500. Exploration and production, a group often highly sensitive to oil price movements, have been particularly hard hit.
Oil’s ongoing struggles could present opportunity with the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x Shares (NYSEArca:DRIP), which takes the -3x or -300% daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has a bullish counterpart, the Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (NYSEArca:GUSH).
Active traders have utilized leveraged and inverse ETFs in a number of portfolio strategies. A small percentage allocations in inverse leveraged options can help hedge or mitigate detraction from existing positions, so investors are simultaneously going long and short to hedge risk. Through leveraged and inverse ETFs, investors may limit portfolio volatility or diminish drawdowns in the event of a steep market correction.
“Volatility for DRIP ETF has been extremely low this year, along with the rest of the market. With the (VIX) hovering below 10 for weeks at a time, things seem awfully stable, except for the oil market, where the past 6 months have been rocky and uncertain,” according to a Seeking Alpha analysis of DRIP. “My analysis suggests the DRIP 3x ETF is more a measure of the implied volatility in the oil market. If traders view the oil market as calm, this ETF is not going to perform as designed.”
While the global oil supply glut has not diminished as quickly as previously anticipated, global oil inventories are still slowly falling and we may see a rebalancing of supply and demand in the second half of the year. That could weigh on DRIP while bringing good fortune for GUSH.
Still, supply remains an issue and one that does not show many signs of abating in the near-term. Meanwhile, advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, but the growth rate of U.S. oil product has also recently slowed.
DRIP is down 7% over the past week.
For more news on oil ETFs, visit our oil category.