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Preparing For OPEC Disappointment With Leveraged ETFs

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Preparing For OPEC Disappointment With Leveraged ETFs
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Leveraged exchange traded funds (ETFs) can be ideal ways for aggressive traders to exploit global events and related headlines, such as meetings of the Organization of Petroleum Exporting Countries (OPEC).

The cartel meets this week, which could present short-term traders with opportunities to tap leveraged fare such as the Direxion Daily Energy Bull 3X Shares (NYSE: ERX) and its bearish equivalent, the Direxion Daily Energy Bear 3X Shares (NYSE: ERY).

Neither ERX nor ERY are plays on oil futures. Rather, the two bellwether leveraged energy ETFs track the Energy Select Sector Index, which is comprised of oil, gas and consumable fuels; and energy equipment and services firms. ERX attempts to deliver triple the daily returns of that index while ERY looks to deliver triple the daily inverse returns of that benchmark. 

OPEC Doubts

OPEC's current output reduction agreement expires in March. Heading into this week's meeting, some oil traders are expressing doubts that the cartel and Russia, the world's largest oil producer that is not an OPEC member, will significantly extend the lower output accord.

“OPEC and Russia, partners in the oil-cuts deal, have crafted the outline of an agreement to extend curbs to the end of next year, according to people involved in the discussions,” reports Bloomberg. “But doubts remain over the size of the reductions after the current accord expires in March, as well as which exit strategy the group will adopt.” 

Although the Energy Select Sector Index is primarily comprised of large-cap, US-based oil companies, OPEC disappointment could, in the short-term, weight on shares of these companies, meaning upside could be lurking for the bearish ERY.

OPEC Support Is Critical

The Energy Select Sector Index is up 6 percent since the start of the fourth quarter as traders have been anticipating OPEC extending its output reductions to trim global supply. Said another way, any disappointments on that front from the cartel could slam the bullish ERX while putting ERY in the spotlight.

Recent data from Direxion indicate traders have been departing leveraged energy ETFs on both sides, bullish and bearish, but that situation could reverse quickly based on the headlines created by OPEC later this week. 

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