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Think The Energy Sector Can't Get Any Worse? This Leveraged ETF Is For You

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Think The Energy Sector Can't Get Any Worse? This Leveraged ETF Is For You

Even with the benefit of some recent upside, the energy sector will rank as the worst-performing in the S&P 500 when 2020 draws to a close on Thursday.

What Happened

The Direxion Daily Energy Bull 2X Shares (NYSE: ERX) has taken its share of lumps this year due to the sector's slide. ERX, which attempts to deliver double the daily returns of the Energy Select Sector Index, is down almost 92% year-to-date.

So severe was the oil crash induced by the first wave of the coronavirus pandemic, that extreme volatility forced a reduction in ERX's leverage, which is to say this was once a triple-leveraged exchange traded fund.

Why It's Important

However, there are inklings some analysts and market observers believe 2021 will be kinder to traditional energy stocks. Whether its bets that travel demand will start to recover, the global economy will shake off the effects of the pandemic, value equities will come back into or simply that the energy sector can't perform much worse in the new year than it did in 2020, ERX has some momentum.

“I think 2021 would be better than 2020. That said, if you look globally, the coronavirus pandemic is still raging. We do have some vaccine announcements, but they should take some time to roll out,” says Morningstar analyst Allen Good. “We anticipate a continued economic recovery as we move through 2021. We'd estimate that this results in an improvement in commodity prices throughout the year. However, that does mean that it's still going to be a rather tough year for oil and gas groups, particularly the integrated oils.”

That does of reality on integrated oil companies is worth acknowledging with ERX because the fund's underlying index is dominated by the likes of Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM).

What's Next

Exxon's ability to engineer a credible rebound that revolves around more than asset sales and dividend protection could be the key to ERX's fate over the course of 2021. At the very least, the former Dow component enters the new year cheap.

Exxon “is particularly cheap. It's sold off in response to its greater investment plans and its investments in oil and gas,” notes Good. “However, as I mentioned, I think this actually creates an opportunity then for differentiation a few years down the road as the underinvestment does ultimately lead to higher oil and gas prices as well as refining margins.”

 

Related Articles (ERX + CVX)

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Posted-In: Analyst Color Long Ideas News Sector ETFs Commodities Markets Trading Ideas ETFs

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