Long and Short Crude Oil ETF (1x, leveraged 2x and 3x)

There are 2 primary ways to profit from changes in crude oil prices either from oil company stocks or crude oil futures directly. Oil futures listed on the CME have a fixed amount face price per contract. The fixed price of futures contract means smaller investors have limited opportunity to adjust the position in the portfolio based on changes in market conditions (Indirectly, investors can also track the crack spread and changes in gasoline with gasoline etf).

It can be confusing with all these ETFs for investors to find the correct fund that has the right risk and return exposure they are looking for to bet on changes in oil prices.

Below is a summary of 2 kinds of oil ETFs traded that tracks changes in crude oil prices. The first kind is ETFs that track energy stocks. The list also highlights the leveraged oil ETFs for those that want to get aggressive in their portfolio. Also most Oil ETF do not pay income, for income focused investors read our latest research on dividend ETFs.

For the most aggressive investors oil ETF 3x can be the fastest and most leveraged way for investors to track oil price movements however it does introduce additional risk into the portfolio.  However it can also be an effective tool from risk management point of view for smaller investors to manage a directional leverage oil position in the portfolio with ETF rather than futures contract.

Oil ETF List

Leverage
Direction
Ticker
ETF
ETF Exposure Type
3x
Long
ERX
Direxion Energy Bull 3x ETF
Oil Stock ETF
3x
Short
ERY
Direxion Energy Bear 3x ETF
Oil Stock ETF
3x
Long
UWTI
VelocityShares 3X Long Crude Oil ETN
WTI Crude Oil ETF
3x
Short
DWTI
VelocityShares 3X Inverse Crude Oil ETN
WTI Crude Oil ETF
2x
Short
SCO
ProShares UltraShort DJ-UBS Crude Oil ETF
Brent Crude Oil ETF
2x
Long
UCO
ProShares Ultra DJ-UBS Crude Oil ETF
Brent Crude Oil ETF
2x
Long
DIG
Ultra Oil and Gas
Oil Stock ETF
None
Long
XLE
Energy Select Sector SPDR® Fund
Oil Stock ETF
None
Long
DBO
PowerShares DB Oil Fund
WTI Crude Oil ETF
None
Long
DBE
PowerShares DB Energy Fund
Combination of Brent, WTI ,Gas and Heating Oil
None
Long
OLO
PowerShares DB Crude Oil Long ETN
WTI Crude Oil ETF
None
Short
SZO
PowerShares DB Crude Oil Short ETN
WTI Crude Oil ETF
2x
Short
DTO
PowerShares DB Crude Oil Double Short ETN
WTI Crude Oil ETF
1x
Long
USO
United States Oil Fund
WTI Crude Oil ETF

Difference between Brent and WTI Crude Oil

Fundamentally, oil is a commodity which in a perfect oil should be priced similarly (excluding cost of transport). Both Brent and WTI are classified as a light sweet crude oil. WTI is predominately reference to US domestic crude oil price and Brent is the global oil benchmark.  The price or spread between these two types called the Brent-WTI spread is a function of regulatory constraints that exist in the market. This is because crude oil produced in the US cannot be exported. Hence any premium of WTI to Brent price would be difficult for the market to arbitrage away. A discount of domestic oil price in the US can be resolved through import of foreign product.

It is important for investors to understand the type of oil commodity the ETF invests in to minimise the tracking error of what is intended vs reality.

Best Oil ETF

United States Oil Fund (USO) is the largest listed oil etf. It invests in NYMEX crude oil futures which can provide investors a easy way of gaining oil commodity exposure in the portfolio. The primary crude oil contract exposure for USO is the front month crude oil contract.

This means USO is very sensitive to near term movements in change of oil price from expectation changes in supply or demand, market liquidity and market sentiment on oil. Concurrently as the front month expire, the position is rolled forward which exposes investors to futures rollover risk.

DB Oil Fund (DBO) is a crude oil futures ETF that does not use leverage. It is a long crude oil ETF but investors can just short the ETF to bet on the decline in oil price. DB Energy Fund (DBE) is a more diversified basket commodity ETF that invest in a variety of energy futures from WTI (22.5%), heating oil (22.5%), brent crude oil (22.5%), RBOB gasoline (22.5%) and natural gas (10%). This can be a good option for those that want exposure across a spectrum of energy future commodities. DB also have a long, short and double short crude oil ETNs. However these never reached scale to be viable for investors to use. It does not have any leverage 3x oil ETFs.

Leveraged 2x Oil ETF – Crude Oil Futures

ProShare Ultra ETF series (SCO and UCO) are 2 leveraged oil ETFs that invests directly in oil futures contracts. The primary oil futures in the ETF is the West Intermediate Texas grade. WTI is the primary benchmark grade of crude oil used in the US energy market. For the global markets, the alternative is the Brent Oil benchmark from oil produced in the North Sea. Both SCO and UCO track 2x the return in the WTI oil futures. It is designed for investors that are looking for direct exposure to domestic US oil prices.

There is no 3x oil ETF that tracks crude oil futures. For investors that are looking those kind of leverage. Direct positions on Oil futures contract can be a viable alternative.

Leveraged 3x Oil ETF

VelocityShares 3X Inverse Crude Oil (DWTI) and VelocityShares 3X Long Crude Oil (UWTI) are two of the largest 3x leveraged oil ETFs. The 3x oil ETFs are like UCO ETF except the goal of these leveraged oil exchange traded fund is to return 3x the daily change in the NYMEX crude. Investors should be using these oil ETFs cautiously as leverage enhance losses as well as gains.

Oil Stock ETF

Energy Select Sector SPDR fund (XLE)  is the largest energy ETF. It is designed for investors that would like energy exposure indirectly through 43 Oil and Gas Exploration, Producers as well as the industry equipment suppliers and drilling suppliers rather than tracking the crude oil futures directly.

A list of energy stocks and their weights in the exchange traded fund is at the end of the article. From examining the list, because the fund is a traditional index tracker which weights exposures based on market capitalization rather than a smart beta fund. The weighted average market capitalization of stocks in the fund amounts to $115 billion.

Examining XLE from a fundamental perspective, XLE is trading at a price to book of 1.8, price to earning of 13.5 and forward P/E of 24. This implies market is pricing a decline in forward earnings relative to today. Overall the companies in the index has a return on equity of 13.5% and dividend yield of 2.5%.

ERX and ERY follows the same index, just with 2x and 3x leverage. For a list of oil and gas companies in XLE see the end of the research note.

Leverage Oil ETF 2x the Energy Stock Index

Ultra Oil and Gas (DIG) provides equity Oil and Gas exposure at 2x index exposure. DIG tracks the Dow Jones U.S Oil and Gas Index. The index allocates 73% of the fund to Oil and Gas producers and 27% to Oil Equipment and Service providers. DIG is like UCO ETF except UCO is invested in oil commodity while DIG owns stocks in oil and gas stocks.

Leveraged Oil ETF 3x the Energy Stock Index

Direxion Energy ETF Series (ERX and ERY) is a oil ETF that tracks Standard and Poor’s Energy Select Sector Index. It has a bear (similar to market inverse ETF) and bull that returns 3x the index return either direction. These two ETFs are best for investors that only invests in stocks and looking for a leveraged position of 3x as sensitive to the diversified energy stock index.

Canadian Oil ETF

Leverage Direction Symbol Name Oil Type
2x Long HOU Horizons BetaPro NYMEX Crude Oil Bull Plus ETF WTI Crude Oil
2x Short HOD Horizons BetaPro NYMEX Crude Oil Bear Plus ETF WTI Crude Oil

 

Canadian investors can use these 2 ETF to take directional position in the oil commodity.  As the name suggest, the underlying type of oil included in the ETFs are NYMEX crude. Effectively these crude oil ETF is a bet on US domestic oil price rather than canadian crude. The dollar exposure of HOU and HOD are hedged so domestic Canadian investors are exposed purely to the commodity price changes.HOU and HOD are two leveraged Oil ETF listed on the TSX. These 2 ETFs are one of the most actively traded on the exchange.

List of Energy Stocks

Name
Ticker
Weight
Exxon Mobil Corporation
XOM
15.97
Chevron Corporation
CVX
13.03
Schlumberger NV
SLB
7.10
Kinder Morgan Inc Class P
KMI
4.41
EOG Resources Inc.
EOG
3.80
ConocoPhillips
COP
3.78
Occidental Petroleum Corporation
OXY
3.34
Pioneer Natural Resources Company
PXD
3.32
Anadarko Petroleum Corporation
APC
3.17
Williams Companies Inc.
WMB
2.92
Valero Energy Corporation
VLO
2.84
Phillips 66
PSX
2.79
Halliburton Company
HAL
2.73
Tesoro Corporation
TSO
2.34
Baker Hughes Incorporated
BHI
2.26
Spectra Energy Corp
SE
2.01
Marathon Petroleum Corporation
MPC
1.89
National Oilwell Varco Inc.
NOV
1.83
Apache Corporation
APA
1.80
Devon Energy Corporation
DVN
1.75
Cabot Oil & Gas Corporation
COG
1.63
Noble Energy Inc.
NBL
1.55
Hess Corporation
HES
1.50
Marathon Oil Corporation
MRO
1.40
FMC Technologies Inc.
FTI
1.06
Cameron International Corporation
CAM
0.94
Range Resources Corporation
RRC
0.85
Southwestern Energy Company
SWN
0.81
EQT Corporation
EQT
0.76
CONSOL Energy Inc.
CNX
0.75
Chesapeake Energy Corporation
CHK
0.75
Murphy Oil Corporation
MUR
0.73
Cimarex Energy Co.
XEC
0.62
ONEOK Inc.
OKE
0.58
Helmerich & Payne Inc.
HP
0.45
Nabors Industries Ltd.
NBR
0.42
Denbury Resources Inc.
DNR
0.38
Ensco plc
ESV
0.36
Newfield Exploration Company
NFX
0.34
Transocean Ltd.
RIG
0.34
Noble Corporation plc
NE
0.26
QEP Resources Inc.
QEP
0.22
Diamond Offshore Drilling Inc.
DO
0.20