Leveraged Energy ETF Rises Again

Neither oil's rally and nor the corresponding move in energy equities are short of doubters. That does not change the fact that the energy sector, the worst performer in the S&P 500 in each of the past two years, has been a freight train to not get in front of in recent weeks.

Over the past month, the Energy Select Sector SPDR (ETF) XLE, the largest equity-based energy exchange-traded fund, is up almost 12 percent. Of course, that is good news for the Direxion Daily Energy Bull 3x Shares (Direxion Shares Exchange Traded Fund Trust ERX). ERX attempts to deliver triple the daily returns of the Energy Select Sector Index, XLE's underlying benchmark. ERX is modestly outdoing itself, jumping more than 37 percent over the past month.

All this while oil supplies show only modest signs of dwindling, energy earnings estimates for 2016 are contracting, market observers expect oil supply to continue outpacing demand, and it would appear next year could be another rocky one for exploration and production equities.

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A Closer Look At ERX

“In fact, oil prices jumped over 9 percent in the first week of March, with U.S. crude currently trading around $36/barrel and Brent oil around $39/barrel. With this, U.S. crude prices are up nearly 33 percent and Brent oil is up 27 percent from their 12-year lows hit in mid-February. Some say there are signs that there are more gains to come,” said Direxion in a recent note.

Despite the headwinds, energy ETFs have been popular with investors this year. For example, XLE has added $988.2 million in new assets and those are legitimate new additions as short interest in the ETF has been steadily declining. XLE's 2016 inflows are good for third best among the sector SPDR ETFs.

ERX has been a decent asset-gathering pace as far as leveraged ETFs go, adding nearly $70 million in new assets this year. Of course, investors should know exactly what ERX is leveraging. To a large extent, it is Exxon Mobil Corporation XOM and Chevron Corporation CVX. The Dow components and two largest U.S. oil companies are over a third of XLE's combined weight.

Bearish Equivalent

Data indicate traders are growing leery of ERX's near-term upside potential. Recently, volume in the ETF has been about average while turnover in its bearish equivalent, the Direxion Daily Energy Bear 3x Shares (Direxion Shares Exchange Traded Fund Trust ERY) has been growing. Over the past month, ERX is averaging daily redemptions while ERY is averaging daily creations, according to Direxion data.