Some of the most known types of commodity exchange-traded products are exchange-traded funds (ETFs) and exchange-traded notes (ETNs) related to oil and natural gas (ETPs). Commodity ETPs allow you to take long positions in commodities—in this case, oil, and natural gas—by purchasing a single product that is easily traded on a stock exchange. These ETPs are designed to track the performance of a commodities futures index before fees and expenses. Futures are derivatives, which means they are financial instruments whose value is derived from the value of other instruments. Futures contracts are contracts to buy or sell a specific asset at a predetermined price on a specific date. Other ETPs allow you to purchase a basket of oil and gas company stocks in a single transaction. They aim to match the return of a stock index in the petroleum industry before expenses.
Oil ETFs and ETNs with Leverage
Some ETPs are leveraged, meaning they rely on derivatives and debt to boost the return of the benchmark they mimic. The Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 2X Shares ETF (GUSH), for example, aims to return 200 percent of the S&P Oil & Gas Exploration & Production Select Industry Index performance each day. Important: Leveraged ETPs can offer high returns, but they also come with a higher level of risk. You could lose all of your money in a single day.Oil ETFs and ETNs that are inverse
By purchasing a single product that is traded on an exchange, inverse oil and natural gas ETFs and ETNs can be used to create short positions (i.e., sell a borrowed stock or share) in those petroleum commodities. A short position is a way to bet on a market's decline. The following is how these two ETPs work: Inverse exchange-traded funds (ETFs) use a variety of futures contracts to mimic the performance of their underlying benchmark. Their stock prices are usually linked to their holdings' net asset value. Inverse ETNs: Unsecured debt securities that aim to outperform their underlying benchmark. If the benchmark they mirror declines by 2% at maturity, the inverse ETN will rise by 2%. You can make money by selling inverse ETFs and ETFs for a higher price than you paid for them. The performance of the underlying index is used to determine the market price of inverse ETNs. The perceived creditworthiness of their issuer has an impact on them as well. If you believe an underlying index or another grouping of investments will fall in value, you can use these inverse ETPs to track it in the opposite direction. You can also hedge against downside risk by holding similar assets when you have a long position. Inverse ETPs are designed to return the inverse of the benchmark. In addition, leveraged inverse ETPs aim to outperform the underlying benchmark by two to three times. Since leveraged and inverse products seek daily investment results, these products can be extremely risky. An investor could profit handsomely from a 2x leveraged inverse ETF if the underlying benchmark drops one day. It could also raise more than it falls the next day, causing the same investor to lose a large portion of his or her profits.Expense-Heavy Short-Term Investments
Leveraged and inverse ETFs and ETNs, as well as the financial instruments that make them up, are typically recalculated every day. Due to the complex rebalancing involved, these ETPs may not accurately reflect the intended opposite performance of their benchmark beyond that specific day. As a result, long-term investments are generally not recommended. In fact, Vanguard, the world's second-largest provider of ETFs, stopped accepting new investments in leveraged or inverse ETFs, ETNs, or mutual funds on January 22, 2019. In addition, inverse ETPs typically have higher expense ratios than other ETPs due to the frequent buying and selling of their underlying derivatives.Oil and Natural Gas ETPs with Leverage
You might want to consider adding some leveraged and inverse oil and natural gas ETFs and ETNs to your portfolio. You should exercise caution and limit your risk exposure. Before investing in these types of products, do your homework. Leveraged- ProShares Ultra Bloomberg Natural Gas ETF (2x): BOIL
- ProShares Ultra Oil & Gas ETF (2x): DIG
- Bear and Direxion Daily Energy Bull 2X Shares ETF (2x): ERX
- S&P Oil & Gas Exploration & Production Direxion Daily Bull and Bear 2X Shares ETF (2x): GUSH
- ETN (2x) MicroSectors U.S. Big Oil Index 2X Leveraged: NRGO
- MicroSectors 3X Leveraged ETN for the US Big Oil Index (3x): NRGU
- ProShares Ultra Bloomberg Crude Oil ETF (2x): UCO
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- DDG: Gas & ProShares Short Oil ETF (-1x)
- DRIP: Gas Exploration & Direxion Daily S&P Oil & Bear and Production Bull 2X Shares ETF (-2x)
- DUG: Gas & ProShares UltraShort Oil ETF (-2x)
- ERY: Bear and Direxion Daily Energy Bull 2X Shares ETF (-2x)
- KOLD: ETF (-2x) ProShares UltraShort Bloomberg Natural Gas
- NRGD: ETN (-3x) MicroSectors U.S. Big Oil Index -3X Inverse Leveraged
- NRGZ: ETN (-2x) MicroSectors U.S. Big Oil Index -2X Inverse Leveraged
- SCO: ETF (-2x) ProShares UltraShort Bloomberg Crude Oil
- YGRN: ETN (-1x) MicroSectors U.S. Big Oil Index Inverse
