Leveraged Energy ETFs Explained

Leveraged energy ETFs are designed to track the performance of energy stocks, but with a twist - they use financial derivatives to amplify their returns.

These ETFs can be 2x or 3x leveraged, meaning they aim to deliver twice or three times the daily return of the underlying energy index.

They're not meant for long-term investors, as their value can fluctuate wildly over time.

In fact, a 2x leveraged ETF can lose up to 40% of its value in a single day if the underlying index falls by 20%.

For another approach, see: 2x Leveraged Semiconductor Etf

Direxion's Leveraged ETFs are designed to provide exposure to various markets, including energy, by using leverage to amplify returns. The performance data for these funds represents past performance, which does not guarantee future results.

Investors should note that the investment return and principal value of an investment in a leveraged ETF will fluctuate, and shares may be worth more or less than their original cost when redeemed.

For another approach, see: Automatic Investment to Dollar Cost Average Lump Sum

Direxion's Leveraged ETFs are bought and sold at market price, not NAV, and are not individually redeemed from a fund. This means that market price returns are based on the midpoint of the bid/ask spread at 4:00 pm EST.

The leverage in these funds is determined on a daily basis, and returns for any other period will not be double or triple the underlying index. Instead, the funds rebalance daily to achieve their implied leverage.

Here's a breakdown of the daily rebalancing process:

This process produces daily leverage results, but over time, the compounding of this reset can potentially vary the performance of the fund versus its underlying benchmark.

The pricing and performance of leveraged energy ETFs can be a bit complex, but let's break it down.

The net expense ratio for ERX is 0.93%, which is the same as the gross expense ratio. This means that the fund's adviser, Rafferty Asset Management, LLC, has contractually agreed to waive all or a portion of its management fee and/or reimburse the fund for other expenses.

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ERX's 1-year return is 0.84%, which is the same as its YTD return. This is a relatively low return, especially considering the fund's inception date of November 6, 2008.

The expense ratio for ERY is 1.15%, which is higher than ERX's expense ratio. This means that ERY has higher fees, which can eat into your returns.

Here are the returns for ERX and ERY over different time periods:

Keep in mind that short-term performance is not a good indication of a fund's future performance, and an investment should not be made based solely on returns.

Investing in a volatile grid with 10% daily fluctuations can be a challenging and unpredictable experience. The market can swing wildly, with a 10% increase one day followed by a 10% decrease the next.

Over a 10-day period, the market can experience significant fluctuations, with a 10-day cumulative change of -4.90% in the flat and volatile grid scenario. This can be seen in the example where the market starts at 100 and fluctuates between 110 and 99 over 10 days.

The daily market performance can be quite volatile, with a 10% increase one day followed by a 10% decrease the next. This can be seen in the example where the market goes from 100 to 110 on day 1, then back down to 99 on day 2.

Here's a breakdown of the daily market performance over the 10-day period:

The expected index level and the expected 2x leveraged long ETF level can also be affected by the daily market performance. For example, on day 1, the expected index level is 110 and the expected 2x leveraged long ETF level is 120.

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Trading leveraged energy ETFs requires a different approach than traditional investing. Trading is different than investing, as noted in our educational resources.

Leveraged energy ETFs are designed to provide magnified exposure to energy markets, but they can also come with higher risks. Use our insights to make sure you're ready to trade in these products.

Direxion's Leveraged and Inverse ETFs offer a range of options for investors looking to trade with leverage.

Worth a look: How to Trade in Stocks Jesse Livermore

The top ten holdings in this ETF are dominated by a few large oil and gas companies. Exxon is the largest holding at 23.40% of the total.

One interesting thing to note is that Exxon's market share is significantly larger than the next largest holding. Chevron Texaco is the second largest holding at 15.56%.

The top five holdings account for over 60% of the total, with Exxon and Chevron Texaco making up nearly 40% alone.

Here are the top ten holdings in the ETF, ranked by their percentage of the total:

These large oil and gas companies are driving the performance of this ETF.

The index sector weightings of this ETF are quite telling. Oil, Gas & Consumable Fuels make up a whopping 90.88% of the total.

This means that the majority of the ETF's holdings are concentrated in the oil, gas, and consumable fuels sectors.

To give you a better idea, here's a breakdown of the sector weightings:

With such a large weighting in oil, gas, and consumable fuels, it's no surprise that this ETF is likely to be sensitive to fluctuations in the energy market.

Trading with leveraged ETFs requires a solid understanding of the risks and benefits involved. These funds are designed to provide daily 2X leverage, allowing you to magnify your short-term perspective.

Direxion offers a range of leveraged ETFs, including bull and bear funds, to help you navigate different market conditions. With these tools, you can go where there's opportunity and stay agile in rapidly changing markets.

Leveraged ETFs are riskier than alternatives that don't use leverage, and they're not suitable for all investors. They pursue daily leveraged investment objectives and shouldn't be expected to track the underlying index over periods longer than one day.

To trade leveraged ETFs, you'll need to purchase them on an exchange, just like stocks. Direxion ETFs can't be bought directly from Direxion, but are available on most trading platforms.

It's essential to educate yourself on how leveraged and inverse ETFs function and behave in various market conditions before trading them. This will help you make informed decisions and avoid potential pitfalls.

Here are some key things to keep in mind when trading leveraged ETFs:

Leveraged ETFs don't provide continuous returns, so if an underlying index is up 5% for a month, the double-leveraged ETF won't be up 10% for the same month.

They rebalance daily to achieve the desired level of assets, which can result in the same direction as the market.

These funds essentially start with a clean slate every day, as if the previous day had not existed, and this process produces daily leverage results.

Over time, the compounding of this reset can vary the performance of the fund versus its underlying benchmark, potentially resulting in greater or lesser degrees of final leverage.

A leveraged ETF typically attains exposure to a notional set of assets equal to 2 times its NAV through daily rebalancing and swaps with counterparties.

The rebalancing activity will almost always be in the same direction as the market, which can impact the fund's performance over individual holding periods.

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