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. Examples of the types of energy commodities typically shorted by these ETFs 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. Earlier this year, the impact of the coronavirus pandemic drove oil prices into negative territory.

Key Takeaways

  • The best (and only) inverse oil ETF is SCO.
  • SCO has dramatically underperformed the broader market over the past year.
  • SCO provides 2x daily short exposure to crude oil prices.

The inverse oil ETF universe is comprised of just a single fund, which is highly leveraged. Leveraged ETFs can generally be identified by the "2X", "UltraShort", "3X", or "Double" label within the fund's name. These funds use financial derivatives and debt to amplify returns and, thus, are considered especially risky. They are used mainly by highly sophisticated investors who have experience with the heightened volatility often associated with energy commodities and leveraged ETFs.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2x ETF may return 2% on a day when its benchmark rises 1%, but you shouldn't expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.

Below, we look at the best (and only) inverse oil ETF for Q4: the ProShares UltraShort Bloomberg Crude Oil (SCO). SCO has underperformed the broader market with a total return of -12.7% over the past year as compared to the S&P 500's total return of 18.0%.  The fund offers daily short exposure to crude oil prices as opposed to stocks of oil companies. All numbers in this story are as of August 20, 2020.

Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

ProShares UltraShort Bloomberg Crude Oil (SCO)

  • Performance over 1-Year: -12.7%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 4,065,549
  • Assets Under Management: $93.1 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. The ETF's leverage is reset on a daily basis, resulting in returns that are compounded when held for multiple periods. Investors with a low tolerance for risk or with a buy-and-hold strategy should avoid this fund.