A Long-Term And Short-Term Way To Play The Move In Oil With ETFs
The Organization of the Petroleum Exporting Countries (OPEC) stirred oil markets Wednesday after agreeing to its first production cut in eight years.
OPEC agreed to cut production by 1.2 million barrels per day (about 5% of current production), causing oil to soar more than 9% to just under $50 a barrel.
Investors jumping into the rally shouldn’t forget that oil has been one of the most volatile commodities in recent years. In June, 2014 the price of oil hit $107.68 a barrel. That was followed by a drop to $26.21 in February of this year.
If you’re looking to play oil’s next big move – long term or short term – there are several ways to play it with ETFs.
A Long-Term Play
For a longer-term play on oil, it’s hard to pass up the “old faithful” of oil: United States Oil Fund (USO).
USO, the largest and most liquid exchange-traded fund in the space, is designed to track the daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil.
While oil’s been hit over the long term due to rising supply and slowing demand, the USO has done an excellent job tracking its benchmark. The fund jumped 8.7% on Wednesday.
A Shorter-Term Play
For traders looking to capitalize on short-term volatility, oil remains a favorite day-trading vehicle by many, consider a pair of ETFs offered by Direxion.
The Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (GUSH) is a leveraged ETF that attempts to deliver a daily return of 300 percent the S&P Oil & Gas Exploration & Production Select Industry Index.
As of September 30, that index is 77.73 percent oil and gas exploration and production companies, 16.48 percent refining and marketing companies, and 5.79 percent integrated oil and gas companies.
On the other side of the trade, the Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP) seeks to deliver -300 percent of that same index. This is possible because the funds maintain 3x the exposure to the index it tracks.
However, it’s important to remember that over the long term GUSH and DRIP will not increase in conjunction with the index. Rather, “they seek daily goals and should not be expected to track the underlying index over periods longer than one day,” according to Direxion.
For example, on Wednesday GUSH skyrocketed 34.6%, while DRIP fell 34.5%.
Source: Direxion Investments
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