Weighing Risks And Opportunities With Direxion's 2X Leveraged Oil ETFs

Big oil giants Chevron Corp CVX and Exxon Mobil Corp XOM moved up slightly in the pre-market session Monday in a bid to recover from last week's losses. Both enterprises – particularly the former – suffered heavy losses following concerns about the economy.

Anxieties only became more heightened on Friday following the release of the August jobs report. Payrolls last month expanded by 142,000, up from 89,000 in July but below economists' forecast calling for 161,000. At the same time, the unemployment rate declined to 4.2%, matching expectations. Still, the so-called "real" unemployment figure – a metric that includes discouraged workers and people occupying part-time roles – jumped to 7.9%.

Naturally, the implication of a slowing economy hurt oil prices, leading to a significant decline in the benchmark indices West Texas Intermediate and Brent Crude. Adding to the jitters, deflated consumer confidence indicators in China has panicked major western brands. In turn, the threat of reduced global hydrocarbon demand negatively impacted oil prices.

If these issues weren't enough, geopolitical dynamics – especially revolving around the Middle East – could unsettle the energy market in unpredictable ways. It's worth pointing out that historically, the countries that make up OPEC+ have cut production to support fading prices.

Still, not every element in the hydrocarbon ecosystem is negative for investors. In the short term, Ukrainian drone attacks on Russian oil installations have greatly damaged the aggressor nation's downstream infrastructure. Continued disruptions could cynically boost oil prices due to the artificial supply destruction.

Over the long run, the International Energy Agency estimates that "India will become the largest source of global oil demand growth between now and 2030." If so, this demand profile may help offset the slowdown from the Chinese market.

The ETFs: With multiple pieces in play, investors willing to play either or both sides of the arena may consider Direxion's vast portfolio of leveraged exchange-traded funds. For the bulls, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares GUSH offer 200% exposure to the performance of the underlying S&P Oil & Gas Exploration & Production Select Industry Index.

The top three holdings of the underlying index are Diamondback Energy Inc FANG, Permian Resources Corp PR and Matador Resources Co MTDR. Those who are bearish on hydrocarbons may consider the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares DRIP. The DRIP ETF aims to replicate 200% of the inverse performance of the aforementioned index.

Irrespective of the fund selected, investors must be aware that GUSH and DRIP must only be held for no more than one day. Otherwise, the daily compounding effect associated with these leveraged vehicles can lead to an unfavorable disassociation between expected and actual fund performance.

The GUSH ETF: Although GUSH started the year off strongly following a minor hiccup in early January, the ETF has subsequently dropped more than 18% on a year-to-date basis.

• Unfortunately for the bulls, the last few sessions seem to have knocked the wind out of the hydrocarbon energy market, with GUSH sitting noticeably below its 50-day moving average ($32.84) and 200 DMA ($34.47).
• Nevertheless, the $27 price range appears to be a long-term support line. Should GUSH hold strong, it could eke out a recovery, especially because of the existence of positive fundamental catalysts.

The DRIP ETF: On the other end of the equation, DRIP got off to a very rocky start in 2024. However, since April, fading oil prices have contributed to profits for the pessimists.

• In contrast to the 2X bull fund, the DRIP ETF enjoyed a robust performance last week, gaining over 15% of market value.
• Whether the bear fund can continue its trek higher remains to be seen. Conspicuously, DRIP is running up against a resistance zone that runs from around $12 to $13.

Featured photo by Pete Linforth on Pixabay.

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