Yesterday was a banner day for leveraged bull oil funds, which posted massive gains amid news of an impending OPEC production limit. Can these ETFs continue to rise, or will the gains once again prove fleeting?
By nature, leveraged ETF products are a fickle animal.
Designed purely for traders with high risk tolerance, these funds provide returns at double or triple the movement of the underlying securities they invest in. The daily moves can be jaw-dropping, and either make or break an entire month’s worth of returns — depending on what side of the trade an investor is on.
The triple-leveraged oil bull VelocityShares 3x Long Crude ETN (NYSE:UWTI) had one of those days yesterday, posting an 18% rise in a matter of a few hours. UWTI is on the rise again this morning, up about 3% from yesterday’s close.
Another popular oil bull play, the ProShares Ultra DJ-UBS Crude Oil (NYSE:UCO), which is a double leveraged fund, rose 9.5% yesterday, and is gaining another 2% today.
But as leveraged products giveth, they also taketh away. With the markets now digesting OPEC production limit news, and analysts taking a skeptical view of the pact, oil could soon resume its downward slide. From Bloomberg:
OPEC can’t control the 60 percent of world production outside its membership and earlier accords have fallen apart. UBS said that because of high inventories and uncertainties over whether the accord will hold, it does “not anticipate a sharp rally in oil prices.” It’s forecasting a Brent price of $52 a barrel in the fourth quarter, up from about $46 before the Algiers meeting.
If oil does pull back again, as many analysts expect it will, UWTI and UCO will take it on the chin once again.
One thing investors absolutely need to be aware of is that these leveraged plays aren’t meant to be held for more than a day or so. Even after yesterday’s spike, UWTI has still plunged 42% year-to-date, despite the fact that crude oil prices are actually up on the year. UCO has also lost nearly 20% of its value in 2016.
So while leveraged oil bull funds may see some short-term follow-through on the OPEC deal, they’ll in all likelihood give up those gains just as quickly.