2023-09-22 10:18:12 ET
Summary
- The article discusses the potential risks and drawbacks of investing in leveraged ETFs, specifically the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares ETF.
- The GUSH ETF aims to provide investors with 200% of the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
- While GUSH has shown impressive performance in recent months, it is considered a high-risk investment and may not be suitable for all investors.
"When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett
I've done a few podcasts recently talking about oil and the recent surge. Opinions are mixed on what happens next, but personally, I believe the rally won't last. A credit event and/or recession breaks all commodities inevitably, and surging oil tends to get reversed (and yes, I recognize the short-term trend remains intact). There's a temptation now to not just overweight energy stocks but lever them as well. At this juncture, I'm totally against that, as I think the odds don't favor it working. Regardless, it's good to keep some levered funds to speculate within the background.
To that end, let's talk about the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares ETF ( GUSH ). GUSH is a leveraged ETF that aims to provide investors with 200% of the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. This index consists of domestic companies from the oil and gas exploration and production sub-industry. The modified equal-weighted index is designed to measure the performance of the sub-industry or a group of sub-industries based on the Global Industry Classification Standards ((GICS)).
GUSH's investment strategy involves the use of derivatives such as futures contracts and swaps, which are subject to market risks that may cause their price to fluctuate over time. One of the key appeals of GUSH is the potential for significant returns when the oil and gas sector performs well. However, it's important to note that this comes with a higher level of risk due to the leveraged nature of the ETF.
ETF Holdings and Components
A closer examination of the index that GUSH uses to target leverage against reveals a diverse range of companies within the oil and gas exploration and production sub-industry. Some of the top holdings include Southwestern Energy (SWN), SM Energy (SM), Antero Resources (AR), EQT (EQT), and Permian Resources Corp. (PR).
direxion.com
The exposure to this sector is predominantly concentrated in oil and gas exploration and production, which constitutes 73.88% of the overall weightings. Oil and Gas Refining and Marketing make up 19.29%, while Integrated Oil and Gas account for the remaining 6.83%.
direxion.com
Performance Analysis
In terms of performance, GUSH had some strong runs but has ultimately gone nowhere for some time.
And when we look at the longer-term picture, the buy-and-hold case for this has been nothing short of devastating.
Peer Comparison
When comparing GUSH to its peers, it's evident that this ETF offers a unique proposition in terms of potential returns. For example, the ProShares Ultra Bloomberg Crude Oil ETF (UCO), another 2x bullish ETF, tracks WTI Crude Oil futures contracts. GUSH is a potentially more attractive trading option for investors seeking leveraged exposure to the oil and gas sector from the equity side, however.
Conclusion
The Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares offers a unique opportunity for investors seeking leveraged exposure to the oil and gas sector. However, it's important to understand that this comes with a high level of risk, particularly in the current credit climate.
While GUSH has shown impressive performance in recent months, its future performance is highly dependent on market conditions and the performance of the oil and gas sector, alongside the daily path of market volatility. Therefore, this ETF should be considered a high-risk, high-reward trade that is best suited for sophisticated and short-term allocators who understand the risks associated with leverage and are capable of actively managing their investments.
This is a hard pass for me.
For further details see:
GUSH: Not Worth The Pain