Top Leveraged Oil ETFs and ETNs

The fluctuation in the price of oil over the years has created many questions. Two, in particular, are the biggest. Will the volatility continue and is this good or bad news for the U.S.?

The biggest benefit to lower oil prices is lower prices at the pump for the consumer. This frees up capital that can be spent elsewhere, potentially on discretionary items. This is a short-term positive. On the other hand, the primary reason for declining oil prices is reduced global demand, especially in the fastest growing economies. Reduced global demand leads to deflation, which means declining prices for goods and services across the board. The first hint at deflation is when commodities, such as oil, decline.

Since nobody alive today has lived through a multi-year deflationary phase, not many people understand it. The Federal Reserve has been fighting tooth and nail to prevent deflation because it wants to avoid another version of the Great Depression. Prior to the Great Depression, deflationary phases were relatively common. While they’re terrible to live through since wage growth and jobs disappear, deflation allows the economy to reset so it can grow organically again. It’s a better and healthier long-term option than attempting to spend your way out of a crisis – which only prolongs the inevitable and creates massive debt.

To simplify, when oil prices go lower, this might be an indication of deflation, which is generally a negative for Americans. However, deflation may be one way to get out of an extremely debt-ridden environment.

Let’s take a look at five of the most popular inverse, leveraged exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that offer ways to short oil. Ideally, you want to see high trading volume, a low expense ratio, healthy net assets and consistent performance. However, oil prices have been on a slow and steady rise over the past few years after bottoming out in 2015. This has put pressure on the recent performance of leveraged oil products.

(For more, see: The Upside of Deflation.)

Tracks 200% the inverse daily performance of the Dow Jones-UBS Crude Oil Sub-Index.

3-Month Average Volume: 2.1 million (as of 10/19/18)

Expenses: 0.95%

Total Assets: $148.5 million

1-Year Performance: -56.53%

3-Year Performance: -62.23%

5-Year Performance: -3.53%

Tracks the inverse daily performance of the Dow Jones U.S. Oil & Gas Index.

3-Month Average Volume: 454 (as of 10/19/18)

Expenses: 0.95%

Total Assets: $1.7 million

1-Year Performance: -12.09%

3-Year Performance: -20.96%

5-Year Performance: -14.09%

Tracks twice the inverse daily performance of the Dow Jones U.S. Oil & Gas Index.

3-Month Average Volume: 50,670 (as of 10/19/18)

Expenses: 0.95%

Total Assets: $20.4 million

1-Year Performance: -23.74%

3-Year Performance: -43.21%

5-Year Performance: -37.37%

Tracks the inverse performance of the Deutsche Bank Liquid Commodity Index-Oil.

3-Month Average Volume: 200 (as of 10/19/18)

Expenses: 0.75%

Total Assets: $1 million

1-Year Performance: -40.30%

3-Year Performance: -22.78%

5-Year Performance: 41.67%

Tracks twice the inverse daily performance of the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return.

3-Month Average Volume: 3,715 (as of 10/19/18)

Expenses: 0.75%

Total Assets: $18 million

1-Year Performance: -56.04%

3-Year Performance: -43.78%

5-Year Performance: 54.61%

While there are no guarantees, any future reductions in global demand could lead to a decline in oil prices. However, keep in mind that geopolitical events, a surprise announcement of reduced production, inflation worries and several other events could lead to a spike in the price of oil. There are significant risks to consider.

At the time this article was written, Dan Moskowitz did not have any positions in SCO, DDG, DNO, DUG, DTO or SZO.