ETF Talk: Seeking a Gusher in Oil

The price of oil and gas is on the rise again. But oil has exhibited wide price swings both up and down during the past year that make predicting its future moves a bit dicey. If you feel like you’ve got a pretty good idea where oil is headed next, you might like the exchange-traded funds (ETFs) that investment firm Direxion has introduced.

Direxion launched both the Direxion Daily Energy Bull 3X Shares (ERX) and the Direxion Daily Energy Bear 3X Shares (ERY) last November, and they offer the proverbial two extremes. The ultra-bullish ERX is designed to replicate 300% of the daily performance of the Russell 1000 Energy Index, while the equally ultra-bearish ERY is designed to replicate 300% of the inverse daily performance of that same index.

You now can go bullish or bearish on the future price of oil, which means you can profit no matter which direction it heads next. But a word of caution is in order here, because when you invest in triple-leveraged funds, you have the potential for absorbing three times the losses if you’re wrong.

When you take a look at the top sector weightings and holdings below for the Russell 1000 Energy Index, it shows that the oil industry and its various companies dominate. With much of the world still dependent on oil to keep industry moving, the lopsided weighting is not surprising.

Naturally, when the value of oil and gas recently soared along with rising hope for an economic recovery, the price of ERX jumped, too. If you had been confident on July 1 that the price of oil was about to shoot up, you could have bought ERX in an attempt to triple your potential profits. Lately, oil has been trading between $65 and $70 a barrel, hitting its highest levels since President Obama won election on Nov. 4. That price is more than double the low of $30.28 a barrel for West Texas Intermediate Crude Oil on Dec. 23. Also encouraging is that Brent Crude Futures topped $70 a barrel last Friday, July 24, to reflect investor sentiment that the price of oil will keep climbing.

For a glance at how ERX has responded, you can see the fund’s sharp spike in the following chart.

It also should not surprise anyone that the bearish oil fund, ERY, is on the opposite trajectory. As oil climbed, ERY fell. With triple the exposure, ERY plunged steeply. In the chart below, you see the sharp decline that began the week of July 6.

While this bet might have been wrong on July 6, ERY could prove to be a good choice if you think that oil and gas prices will plummet again, after the current upswing in oil prices ends.

So, if you’re confident in the future price of oil and gas, and if you have enough conviction to accept triple exposure and high volatility, these leveraged oil funds may appeal to you. For those of you who want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here . As usual, I am happy to answer any of your questions about ETFs. To send me your questions, please click here. It may spark an idea for a future ETF Talk.