Fluctuating oil prices and talks of a trade war, among other things, caused energy sectors stocks to tumble throughout 2018. Although there were reasons to be optimistic at various points throughout the year, the last few months of 2018 were particularly rough: October constituted the worst single month for the sector in the better part of a decade, and the final weeks of the year saw stock prices plummet along with the market overall.
These were uncertain times with volatile movements among individual energy stocks and exchange-traded funds (ETFs) following the sector tended to perform similarly. Like many other sector-specific funds in other areas, energy ETFs on the whole ended 2018 with overall losses for the year. However, there was a small subset of energy ETFs which not only survived the twists and turns of the market but indeed thrived because of the performance of energy stocks. These funds intentionally bet against the energy sector.
Each of the top five performing energy ETFs for 2018 based on overall returns for the year adopted a shorting strategy of this kind. It's worth keeping in mind, however, that ETFs offering inverse exposure, as each of these does, are generally intended for short-term trading only. It's unlikely that investors would have anticipated the gains these funds would make over the entire year. As many inverse funds rebalance daily, investors holding the funds for longer than that period tend to see their returns skewed away from the funds' targets. We'll compare these funds to the S&P 500 Energy Index as a benchmark, which saw an average return of -21.7%.
1. Direxion Daily Natural Gas Related Bear 3X Shares ETF (GASX)
Returns for 2018: +149.8%
2. Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares ETF (DRIP)
Returns for 2018: +61.9%
3. Direxion Daily Energy Bear 3X Shares ETF (ERY)
Returns for 2018: +53.1%
4. ProShares UltraShort Oil & Gas ETF (DUG)
Returns for 2018: +40.9%
5. ProShares Short Oil & Gas ETF (DDG)
Returns for 2018: +21.9%
Direxion Daily Natural Gas Related Bear 3X Shares ETF
When the energy sector is performing poorly, those ETFs which make the biggest bets against this pool of stocks tend to do best. For this reason, the Direxion Daily Natural Gas Related Bear 3X Shares fund (GASX), which offers -3x leveraged daily exposure, was able to claim the top spot among energy ETFs this year. An investor who held onto GASX for the entire year would have seen returns of nearly 150%. GASX is conceived as the short alternative to GASL; each fund offers exposure to the ISE-Revere Natural Gas Index. GASX is able to offer leverage for its investors through swap agreements, contributing to a higher level of risk.
GASX was closed in September of 2014 and subsequently relaunched in December of 2015. It carries an expense ratio of 1.08% and currently has just under $6 million in its asset base, making it a small ETF.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares ETF
Another Direxion ETF offering -3x daily exposure is the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares fund (DRIP). DRIP offers investors leveraged inverse daily exposure to the S&P Oil & Gas Exploration & Production Select Industry Index, which weighs the largest oil and gas exploration and production outfits in the U.S. equally. Because of the weighting, DRIP slightly favors smaller companies, which combines with the leverage employed by the fund to produce a highly risky and volatile fund. Like the other funds on this list, DRIP was designed as a short-term tactical investment tool. Nonetheless, if one were to hold the fund for the entirety of 2018, the overall returns would have been 61.91%.
DRIP was launched in May of 2015 and carries an expense ratio of 1.07%. It has just over $40 million in its asset base.
Direxion Daily Energy Bear 3X Shares ETF
The Daily Energy Bear 3X Shares ETF (ERY), also by Direxion, is yet another fund offering -3x exposure to a portion of the energy sector. ERY tracks the S&P Energy Select Sector Index, a group of energy names taken from the larger S&P 500. ERY is focused primarily on the largest energy companies, including Chevron and Exxon. As indicated above, it's unlikely that an investor would buy and hold ERY for the entirety of 2018, let alone for a period longer than a day. However, taken over the full duration of the year, ERY returned 53.10%.
ERY was launched in November of 2008 and carries an expense ratio of 1.07%. It has assets under management of $25.51 million.
ProShares UltraShort Oil & Gas ETF
ProShares UltraShort Oil & Gas ETF (DUG) earns the fourth spot on our list, with overall returns for 2018 of 40.9%. DUG also provides leveraged inverse exposure to a segment of the energy sector, but in this case the leverage is only -2x. DUG tracks the Dow Jones U.S. Oil & Gas Index, a market-cap-weighted collection of U.S.-based energy names. As above, DUG is rebalanced daily and not typically held for a period longer than a single trading day.
DUG was launched in January of 2007 and carries an expense ratio of 0.95%. It currently has an asset base of $18 million.
ProShares Short Oil & Gas ETF
With a strategy that is in many ways identical to DUG, the ProShares Short Oil & Gas ETF (DDG) earned just under 22% for 2018. While DUG offers leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index, DDG does not employ leverage.
DDG was launched in June of 2008 and carries an expense ratio of 0.95%. It currently has assets under management of $2.05 million.