We have selected four exchange-traded funds (ETFs) that concentrate on shorting oil stocks. The funds were selected based on assets under management (AUM) as of September 10, 2018. You would use these investments when you think the price of oil will drop. Note that none of the ETFs short actual oil stocks – instead, they seek performance that is the inverse of an index. (See: The Five Best Energy Stocks for 2018)
Some of these ETFs are leveraged, meaning they may use derivatives, futures contracts or other advanced investment vehicles to achieve their goals. Whenever you see "2X," "Ultra Short," "3X" or "Double" in the fund's name, it is a leveraged fund. Because these funds try to beat an index by two times or more, they can lose twice or three times the amount of money as well. (See also: New Leveraged Oil ETFs Coming Soon.)
Oil prices are currently hovering near 3-year highs, with Brent crude prices at $77.36 and WTI light crude at $67.58. Prices have been rising in response to a variety of factors, both economic and political. The International Energy Agency says oversupply appears to be ending and OPEC and 10 other producers cut a deal in December to extend production limits through the end of 2018. With these and other factors in place, prices are expected to continue to rise through year-end. However, no commodity price rises in a straight line. Investors who anticipate short-term drops in the price of oil can use inverse oil ETFs to take advantage of the drops. That makes these ETFs short-term plays in the current oil environment. (See also: The Risks of Investing in Inverse ETFs.)
Some investors use inverse oil ETFs to cover losses they incur in their long oil positions during downtrends. Others abandon long positions during down periods and short an oil index to increase profitability from oil investments. Here is how the top five inverse oil ETFs break down.
Launched in March 2017, this new ETF is designed to deliver three times the inverse return of the Bloomberg WTI Crude Oil Subindex. Although the stated goal is to return -300% of the index's performance, investors should not expect to achieve this result for longer than one day. Like other inverse funds, the effects of contango and compounding daily returns mean that holding OILD beyond one trading session can generate returns that differ significantly from the results of the index. (For more, see: Leveraged Oil ETFs Come Again.)
The Bloomberg WTI Crude Oil Subindex also provides the benchmark for this ETF, but SCO has a goal of achieving the inverse of the index by 200%. This indicates that SCO is also leveraged and carries high risk due to its aggressive methods. Note that the target index tracks oil futures prices.
- Average Volume: 1,929,300
- Net Assets: $155.11 million
- 2018 YTD Return: -37.95%
- Expense Ratio (net): 0.99%
The focus of DTO is light sweet crude oil. The fund's money managers utilize the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return. This is a short play for investors who want to anticipate crude oil prices as directly as possible. However, since the fund is leveraged, it may hold investments that are aggressive and carry higher risk. (See also: SCO vs. DTO: Comparing Short Oil ETFs.)
- Average Volume: 4,015
- Net Assets: $17.96 million
- 2018 YTD Return: -39.42%
- Expense Ratio (net): 0.75%
DNO focuses on West Texas Intermediate (WTI) light crude oil. However, it may also engage in futures contracts that involve additional types of crude, as well as diesel, heating oil, gasoline and natural gas. This fund's benchmark is futures contracts that trade on the New York Mercantile Exchange and deal with WTI light crude.
- Average Volume: 5,736
- Net Assets: $9.04 million
- 2018 YTD Return: -20.57%
- Expense Ratio (net): 0.75%
The Bottom Line
Anyone shorting oil with the ETFs on this list must watch oil prices diligently and be prepared to act quickly to get out of a short ETF if the price movement of oil is up. Furthermore, it is important to research and monitor each ETF, as they have different investment styles and track different indexes. (See also: The Long and Short of Trading Oil ETFs.)