Earnings Season Excitement With Energy ETFs

A nice fourth-quarter surge helped the energy sector avoid a nasty 2017 loss, but the S&P Energy Select Sector Index still finished last year in the red, making energy one of the worst-performing sectors in the S&P 500.

Not much has changed in 2018. The index is up a measly 2 percent as of Wednesday's close. With energy earnings on the horizon, there's an opportunity to play the sector on nearterm upside and downside via the Direxion Daily Energy Bull 3X Shares ERX and the Direxion Daily Energy Bear 3X Shares ERY.

ERX seeks to deliver triple the daily returns of the Energy Select Sector Index while the bearish ERY attempts to mirror three times the daily inverse returns of that index. 

Earnings Opportunities

The energy sector is expected to post the best earnings growth of the 11 sectors represented in the S&P 500.

“The Energy sector is expected to report the highest (year-over-year) earnings growth of all 11 sectors at 41.5 percent,” according to FactSet research. “At the sub-industry level, all six sub-industries in the sector are projected to report earnings growth: Oil & Gas Drilling (N/A due to year-ago loss), Oil & Gas Exploration & Production (300 percent), Oil & Gas Equipment & Services (65 percent), Oil & Gas Refining & Marketing (32 percent), Integrated Oil & Gas (23 percent), and Oil & Gas Storage & Transportation (20 percent).” 

The benchmark ERX and ERY follow allocates about 85 percent of its weight to integrated oil names, exploration and production firms and refiners with oil services companies commanding the rest. What traders really get with ERX and ERY are bets on or against Exxon Mobil Corp. XOM and Chevron Corp. CVX because those stocks combine for over 40 percent of the index's weight.

How Traders Are Positioning

If ERX and ERY are accurate gauges, it is fair to say traders are betting most of the good earnings news for the energy sector is already priced in.

Over the past months, traders have been pulling an average of $3.5 million per day from ERX, according to Direxion data. Conversely, money has been flowing into the bearish ERY as that inverse energy ETF is average daily inflows of over $328,500 over the same period. 

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