Market Overview

Breaking Down The Energy ETF Trade


Energy equities and the related exchange traded funds (ETFs) were drubbed in February. For example, the Energy Select Sector SPDR (NYSE: XLE), the largest energy sector ETF, plunged 10.8 percent last month, notching its worst monthly showing since December 2015.


What was bad for traditional energy funds was excellent for the inverse counterparts. Last month, each of the three worst-performing bullish leveraged ETFs in Direxion's lineup were leveraged energy sector funds. Conversely, two of the issuer's three best-performing inverse leveraged funds were bearish plays on the energy space.


In February, the Direxion Daily Energy Bear 3X Shares (NYSE: ERY) returned nearly 36 percent while the Direxion Daily Natural Gas Related Bear 3X Shares (NYSE: GASX) surged almost 37 percent.


Treading Carefully


Undoubtedly, those are impressive performances by ERY and GASX in February, but traders should not be seduced into thinking leveraged ETFs should be held over the course of an entire month. That simply is not the case. While ERY and GASX surged in February, the best use of these products and others like them is over the short-term or intraday periods.


Consider this: Of the six most volatile Direxion leveraged ETFs in February, bullish and bearish, two were energy funds, according to issuer data. Not to mention ERY and GASX led the way in terms of 30-day variance relative to their underlying benchmarks. The performance of the two funds was mixed Thursday even amid concerning energy data.


“Domestic crude supplies rose by 3 million barrels for the week ended Feb. 23. Analysts surveyed by S&P Global Platts had forecast a climb of 2.1 million barrels. Rising supply, along with falling demand, is a primary driver behind weakness in oil prices,” according to MarketWatch.


Be Careful Part II


Another reason for traders to tread carefully with the likes of ERY and perhaps consider its bullish counterpart, the Direxion Daily Energy Bull 3X Shares (NYSE: ERX), is that the energy sector often performs well in March.


Some traders appear to be preparing for just that as ERX has averaged daily inflows of over $3.7 million over the past 30-days, according to issuer data.


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