Market Overview

A Beaten Up Energy ETF May Win Either Way On Election Day

A Beaten Up Energy ETF May Win Either Way On Election Day

The Energy Select Sector Index is lower by 51.15% year-to-date, confirming that 2020 has been a brutal year in the oil patch.

What Happened

Weakness in that benchmarks has wrought havoc on leveraged exchange traded funds, including the Direxion Daily Energy Bull 2X Shares (NYSEARCA: ERX) with pressure on oil equities intensifying amid slack demand caused by the coronavirus pandemic.

Adding to the problems for ERX and friends is the specter of a blue wave – the scenario where former Vice President Joe Biden wins the White House and Democrats take the Senate while maintaining control of the House.

Why It's Important

ERX attempts to deliver double the daily returns of the aforementioned Energy Select Sector Index, meaning it's been an awful time to consider the geared ETF.

Compounding the woes of ERX is that the blue wave, assuming it arrives, is nearly universally viewed as a boon for renewable energy stocks while being a potential nail in the coffin of fossil fuels producers. Alas, sometimes conventional wisdom isn't all it's cracked up to be. In fact, ERX may be in a can't lose situation following Election Day.

“If Trump wins, fracking is here to stay, and some of the significant inflows into green strategies will have to reverse,” opines Rareview Macro founder Neil Azous in a recent note. “If Biden wins and fracking is banned, crude oil should trade significantly higher on less supply.”

What's Next

Then there's economic reopening to consider. Should the global economy reopen in force on the back of positive vaccine news, shorts sellers engaged with energy names could be forced to cover.

“If the world reopens because the virus fades, the factor exposure short energy on any time horizon in a model will be offsides and see significant short covering,” adds Azous.

And recent political history is worth remembering. Clearly, fossil fuels have seen better days, but renewable energy stocks are thriving while Trump occupies the Oval Office. The reverse was true under President Obama. If that pattern repeats, ERX could offer some near-term upside even Biden emerges victorious on Nov. 3.




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