Leverage-Hungry? Play the Energy Wave with 'ERX' | ETF Trends

The energy sector has been rallying the past few months, with the S&P 100 Energy Index up close to 40%. Leverage-hungry traders can keep on riding the rally with ETFs like the Direxion Daily Energy Bull 3X Shares (ERX).

ERX seeks daily investment results equal to 200% of the daily performance of the Energy Select Sector Index. The index is provided by S&P Dow Jones Indices and includes domestic companies from the energy sector, which includes the following industries: oil, gas and consumable fuels, and energy equipment and services.

Taking a look under the hood of ERX, there are some familiar names in big oil, such as Exxon Mobil Corporation and Chevron Corporation. Those two holdings comprise almost 35% of the fund’s assets, so oil prices play a major role in the performance of ERX.

Speaking of performance, a recent rally in oil prices is feeding into strength for ERX. The fund is up over 90%, outpacing the S&P 100 Energy Index thanks to that extra leverage.

ERX Chart

Per an OilPrice.com article, this week’s trading session thus far saw oil “hit some milestones in the year-long recovery from the oil demand crash of 2020.”

“West Texas Intermediate, (WTI) hit and moved past the $55.00 level, and Brent moved closer to $60,” the article continued. “These are some important psychological barriers for the market, and if sustained, as we expect they will be, will push prices higher.”

Goldman Sachs Expects Higher Oil Prices

Basic supply and demand factors will continue to play a part in oil prices in 2021 as the world continues to recover from 2020’s fiasco. Global investment firm Goldman Sachs is expecting price increases as a result of tighter supply in 2021.

Per the article, “Goldman Sachs, (NYSE:GS), has recently called for $65 Brent by mid-year. With the narrow spread ($2-3.00) between Brent and WTI in recent times, this would put WTI into the low $60’s.”

“With vaccines being rolled out across the world, the likelihood of a fast tightening market from 2Q 2021 is rising as the rebound in demand stresses the ability of producers to restart production,” said Goldman’s global head of commodities research Jeffrey Currie.

Looking at the Bloomberg Gas Oil Subindex, the ‘golden cross’ materialized on December 15, 2020, with the 50-day moving average crossing up past the 200-day moving average. This resulted in a 13% rise in the index, so momentum is on its side, which can also be confirmed by using the 72.55 relative strength index (RSI).

^BGOS Chart

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