After OPEC Production Cut, These Leveraged ETFs Still Merit Attention

The Organization of Petroleum Exporting Countries (OPEC) delighted oil investors Wednesday when it announced it would cut output by 32.5 million barrels per day. Not surprisingly, many of the day's best-performing exchange-traded funds were energy plays.

Leveraged Energy ETFs And The OPEC Meeting

Of the top 28 non-leveraged ETFs in terms of Wednesday percentage gains, all were energy funds. That also means good things for leveraged ETFs. Just look at the Direxion Daily Energy Bull 3X Shares (Direxion Shares Exchange Traded Fund Trust ERX), which surged more than 15 percent Wednesday. That showing confirms the utility of leveraged ETFs as short-term plays on significant market-moving events, such as OPEC meetings.

However, simply because an OPEC meeting has come and gone, that does not mean ERX's usefulness has evaporated. With January’s earnings season just around the corner, ERX is a leveraged ETF that aggressive, risk tolerant traders should monitor.

“Big oil earnings are poised to double next year as crude prices continue to march higher and oilfield services costs remain depressed,” said Doug Terreson on CNBC. Terreson is head of energy research at Evercore ISI and Institutional Investor's top-rated analyst for integrated oil.

ERX attempts to deliver triple the daily returns of the S&P Energy Select Sector Index. The Direxion Daily Energy Bear 3X Shares (Direxion Shares Exchange Traded Fund Trust ERY), ERX's bearish counterpart, looks to deliver triple the daily inverse returns of that benchmark.

S&P Energy Select Sector Index

That index “is developed and maintained in accordance with the following criteria: (1) each of the component securities in the Index is a constituent company of the S&P 500 Index; (2) each stock in the S&P 500 Index is allocated to one and only one of the Select Sector Indexes; and (3) the Index is calculated by using a modified "market capitalization" methodology, which is a hybrid between equal weighting and conventional capitalization weighting with the weighting capped for the largest stocks included in the Index,” according to Direxion.

Energy And Earnings

Energy, the seventh-largest sector weight in the S&P 500, is one of just two groups considered to be significantly undervalued relative to the U.S. equity benchmark. Combine that with expectations of robust earnings growth and ERX could be worthy of consideration when fourth-quarter earnings start rolling in.

One thing to consider and a possible idea for how to use ERX or ERY around earnings is that the aforementioned index the ETFs track allocates nearly a third of its overall weight to Exxon Mobil Corporation XOM and Chevron Corporation CVX, which usually deliver earnings within a day of each other.