Bears Look To Feast On This Energy ETF

Although the energy sector is the worst-performing group in the S&P 500, the sector, broadly speaking, has not drawn a significant amount of bearish bets this year. In fact, some of the marquee exchange traded funds tracking the S&P 500's seventh-largest sector weight have paltry short interest when considering how poorly the group is performing.

Options market data suggests some traders are warming up to the idea of bearish energy sector bets and those wagers are targeting a familiar ETF: The SPDR S&P Oil & Gas Exploration & Production ETF XOP. Often volatile and highly correlated to oil prices, XOP has been in a tailspin this year. The ETF is off 4.5 percent over the past week, bringing its year-to-date loss to over 18 percent. Down almost 27 percent from its 52-week high, XOP meets the definition a bear market.

“On renewed weakness in the name today after a brutal last week, we have seen an appetite for June 32 puts (XOP is trading at around $33.30 at the moment and its 52-week low is $32.21),” Street One Financial Vice President Paul Weisbruch said in a Monday note. “Fund flows have still leaned positive in XOP, in spite of the underperformance lately, as XOP has net pulled in about $50 million year to date. This puts the fund at about five times the size as the next largest ETF in the space, which is the iShares U.S. Oil & Gas Exploration & Production ETF IEO.”

Down 13.5 percent year to date, IEO has been only slightly less worse than the rival XOP. Traders looking to play more downside among exploration and production stocks have alternatives to put options.

For example, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP attempts to deliver triple the daily returns of the same benchmark XOP tracks. After surging 8.4 percent on Tuesday, DRIP is up nearly 14 percent over the past week.

IEO and XOP have seen modest inflows year to date. On a combined basis, the two ETFs have added more than $80 million since the start of 2017.

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