Inverse oil exchange-traded funds (ETFs), which are leveraged and can be highly risky, seek to short either a single energy commodity or a combination of several energy commodities. These include crude oil, gasoline and heating oil. These ETFs gain when prices of the underlying oil-based commodities fall, which can occur due to a drop in global demand or a rise in global supply. The coronavirus pandemic and its impact on economic activity is currently depressing global demand and oil prices, and threatens to push down prices further.
The early 2020 oil price war and the COVID-19 pandemic have driven oil prices to record lows as of late April, 2020. As a result, oil markets have become extremely volatile, and investing in the oil and gas sector has become substantially more risky than usual. Prices and data in this article were accurate at the time of writing, but likely have changed significantly as a result of the aforementioned market volatility.
The inverse oil ETF universe is comprised of about 6 funds. These are highly leveraged, as generally indicated by the "2X", "UltraShort", "3X", or "Double" label within the fund's name. Leveraged ETFs use financial derivatives and debt to amplify returns and, thus, are considered especially risky. These vehicles are used mainly by highly sophisticated investors who have experience with volatility in energy commodities and also with leveraged ETF price swings.
These ETFs hold commodities as opposed to equities of energy companies, which tend to be less volatile. Investopedia normally does not cover these kinds of leveraged funds due to their high-risk characteristics, but there are no non-leveraged inverse oil ETFs.
While still risky, there's one inverse oil ETF that has more liquidity and trading volume than comparable funds: the ProShare UltraShort Bloomberg Crude Oil (SCO). All the other inverse oil ETFs are either too small or have too low trading volume to be easily investable (Funds with less than $50 million in assets under management and with an average daily trading volume under 10,000 were excluded). Considering how risky inverse ETFs already are, and the fact that they're leveraged, means that the ability to easily exit an investment is more important than usual.
- Performance over 1-Year: 283.7%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 3,919,136
- Assets Under Management: $176.4 million
- Inception Date: November 24, 2008
- Issuer: ProShares
SCO is structured as a commodity pool offering 2x daily short leverage to the broad-based Dow Jones-UBS Crude Oil Sub-Index. The fund may be used by sophisticated investors with a bearish short-term outlook for crude oil, but should be avoided by investors with a low tolerance for risk.