Inverse ETFs To Short Oil As Crude Prices Tumble [ProShares UltraShort DJ-UBS Crude Oi ETF]

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October 21, 2014 5:34pm NYSE:DTO NYSE:SCO

new etfsOil prices which were trading in the triple-digit mark for the most part of the first half of the year are now trading near 52-week lows. Slowing demand and a supply glut have led the global benchmark Brent crude to shed more than 25% since June.

Brent crude for December delivery recently slipped to $82.93 a barrel – the lowest level in four years. West Texas Intermediate crude slumped to almost $80 a barrel – the lowest level in more than two years.

While a strong dollar and global growth concerns including slowdown concerns in China, sluggish growth in Japan and recessionary fears in Europe are some of the factors behind the slump in demand, U.S. shale gas boom has boosted U.S. oil output to the highest level in 30 years.

In fact, global economic worries have deepened after a recent report pointed that U.S. producer prices declined for the first time this year and China’s consumer inflation fell to the lowest level in five years.

Moreover, the Organization of the Petroleum Exporting Countries (OPEC) seems to be least concerned in preventing the slide. There are speculations doing the rounds that Saudi Arabia and other members of the OPEC will abstain from production cuts to drain surplus.

In fact, the largest producers of OPEC are instead cutting prices to compete for market share.  Their strategy is to curb investments and further increase supply from U.S. shale or other avenues. Moreover, oil production from OPEC countries rose to its highest level since the summer of 2013 in September, led by higher supply from Iraq and Libya.

The price cut rather than the supply cut has further led to a panicky situation in the oil markets, pushing oil futures into a bear market.

Adding to the concerns, International Energy Agency in Paris predicts global oil demand to rise by 650,000 barrels a day this year – the slowest growth since 2009 due to slowing growth in key areas like China and Europe (read: 3 Foreign ETFs Rising Despite Market Volatility).

Given the situation, investors might want to consider shorting oil. Though futures or short-stock are some of the possible ways for doing so, there are a host of short oil ETF options which may make more sense for many investors.

So, for investors seeking to make an inverse bet on oil, we have highlighted below four ETFs, any of which can be used to make a short play on oil.

However, investors should keep in mind that a short play in the futures market requires a strong appetite for risks.

ProShares UltraShort DJ-UBS Crude Oil ETF (SCO)

SCO is the most popular option in the short oil ETF space having an asset base of $169.1 million. The fund tracks the Dow Jones-UBS Crude Oil Sub-Index to provide twice the inverse performance, on a daily basis of WTI crude oil.

Volumes are also great as roughly 1.3 million shares change hand daily. However, expenses are a bit steep at roughly 95 basis points annually.

PowerShares DB Crude Oil Double Short ETN (DTO)

Investors seeking to use the ETN approach to inverse crude investing can consider DTO for exposure. The fund follows a benchmark of crude oil futures contracts to provide -2x exposure.

While the fund manages a small AUM of $66.9 million, volumes are pretty good at about 110,000 shares a day. Also, the fund is relatively cheaper with 75 basis points as annual fees (see all Inverse Commodity ETFs here).

PowerShares DB Crude Oil Short ETN (SZO)

SZO is the least risky bet in the space providing -1x short exposure to WTI crude. The ETN tracks the Deutsche Bank Liquid Commodity Index-Oil for this purpose, while it also adds in the yield from short-term T-bills.

However, the product is quite unpopular with an asset base of just $7.8 million and trades with low volumes of under 3,000 shares, which might result in additional costs in the form of wide bid-ask spreads. Expenses come in at 75 basis points annually.

VelocityShares 3x Inverse Crude ETN (DWTI)

DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing.  The fund tracks the S&P GSCI Crude Oil Index to provide exposure to crude oil.

However, the product is quite unpopular with a low asset base of trading volume. Moreover, it is quite pricey charging 1.35% as annual fees.

This article is brought to you courtesy of Zacks.

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