With oil on pace for its worst quarterly performance in 30 years, traders are looking for leveraged exchange traded products with which to take advantage of crude’s woes as well as position for a possible rebound in the downtrodden energy sector.
In fact, there’s evidence to suggest some traders are willing to wager on a rebound for the energy sector as Rex Shares, the company behind the MicroSectors lineup of exchange traded notes (ETNs), recently upsized the MicroSectors U.S. Big Oil Index 3x Leveraged ETN (NRGU).
That triple-leveraged product was upsized to accommodate $75 million, up from $50 million. The Solactive MicroSectors U.S. Big Oil Index, NGRU’s underlying index, is an equal dollar weighted index designed to track the prices of the 10 U.S. stocks in the oil/energy sector with the largest free-float market capitalization.
Index constituents are Anadarko Petroleum (APC), ConocoPhillips (COP, Chevron (CVX), EOG Resources (EOG), Marathon Petroleum (MPC), Occidental Petroleum (OXY), Phillips 66 (PSX), Pioneer Natural Resources (PXD), Valero Energy (VLO), and ExxonMobil (XOM).
NGRU is a leveraged alternative to geared funds tracking the S&P 500 Energy Index and the Dow Jones Energy Index, both of which are dominated by Exxon Mobil and Chevron.
“As of today, each index has over 40% of exposure to these two securities despite including a basket with a larger number of energy stocks. As of February 28, 2020, the Energy Select Sector Index had 28 constituents and the Dow Jones U.S. Oil & Gas Index had 49 constituents. Regardless of that diversification, investors may not be aware of the current stock concentration,” said Scott Acheychek, President of REX Shares.
Oil and energy stocks may not be the most attractive assets for bullish investors at the moment, but there’s an indication that traders have an appetite for NGRU.
“NRGU offers sophisticated investors daily resetting 3X leverage. Despite the substantial sell-off in energy stocks, there continues to be strong demand for NRGU,” said Acheychek.
According to major bank expectations, West Texas Intermediate futures, the main U.S. benchmark, is expected to trade at an average of $34.95 a barrel in 2020, the Wall Street Journal reports. Meanwhile, Brent crude, the global benchmark, will average $38.12 this year, its lowest since 2004.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.