Best (and only) inverse oil ETF in the first quarter of 2022

Reverse oil exchange-traded funds (ETFs) are leveraged and may have high risks. They seek to short a single energy commodity or a combination of multiple energy commodities. The types of commodities that these ETFs usually short sell include crude oil, gasoline, and heating oil.

These ETFs will rise when the price of the base oil commodity falls, which may be due to a decline in global demand or an increase in global supply. Since the beginning of 2020, oil prices have rebounded sharply, when the impact of the coronavirus pandemic pushed oil prices into negative territory. Due to the rebound in oil prices, it is not surprising that reverse oil ETFs have fallen sharply.

Key points

  • The best (and only) reverse oil exchange traded fund (ETF) is SCO.
  • In the past year, oil prices have risen faster than the US stock market.
  • SCO provides a short exposure of 2 times the daily crude oil price.

The U.S. reverse oil ETF field consists of a single highly leveraged fund. Leveraged ETFs can usually be identified by the “2x”, “UltraShort”, “3x” or “Double” label in the fund name. These funds use financial derivatives and debt to amplify returns and are therefore considered particularly risky. They are mainly used by highly sophisticated investors who have experience with the high volatility normally associated with energy commodities and leveraged ETFs. By combining reverse and leverage strategies, reverse leveraged ETFs are particularly complex and risky tools, and less sophisticated investors should avoid using them.

Leveraged ETFs may be riskier investments than unlevered ETFs because they respond to daily changes in the underlying securities they represent, and losses may be magnified during adverse price changes. In addition, leveraged ETFs are designed to achieve a multiplier of their one-day returns, but you should not expect them to achieve long-term returns. For example, a 2× ETF may return 2% in a day when its benchmark rises by 1%, but you should not expect it to return 20% in a year when its benchmark rises by 10%. For more details, please refer to this U.S. Securities and Exchange Commission (SEC) alert.

Next, let’s take a look at a reverse oil ETF traded in the United States: ProShares UltraShort Bloomberg Crude Oil (SCO) ETF. As of November 16, 2021, oil prices have risen by 86.9% in the past year, almost three times the S&P 500’s total return of approximately 31.5%. However, neither the S&P 500 Index nor oil prices are appropriate benchmarks for SCO. SCO is designed to meet a one-day performance target, not a longer period of time. SCO provides short exposure to daily crude oil prices through the use of futures contracts. It does not short oil company stocks. All figures below are as of November 12, 2021.

Compared to non-inverted ETFs, inverted ETFs may be riskier investments because they only aim to achieve the inverse of their benchmark one-day returns. You should not expect them to do this in terms of long-term returns. For example, an inverse ETF may return 1% in a day when its benchmark falls by -1%, but you should not expect it to return 10% in a year when the benchmark falls by -10%. For more details, please refer to this SEC alert.

  • Performance over one year: -78.3%
  • Expense rate: 0.95%
  • Annual dividend yield: Not applicable
  • 3-month average daily volume: 1,616,932
  • Assets under management: US$118 million
  • Date of Establishment: November 24, 2008
  • Publisher: ProShares

The structure of SCO is a commodity pool, a private investment tool designed to combine investors’ contributions to futures and commodity market transactions. The ETF seeks a daily investment return (before fees and expenses), which is twice the reciprocal (-2 times) of the daily performance of the Bloomberg Commodity Balance WTI Crude Oil Index (crude oil futures contract index). The fund holds short positions in oil futures contracts, not the spot price of oil. Currently, it is short futures expiring in February 2022, June 2022, and December 2022. The fund can be used by sophisticated investors who are bearish on crude oil’s short-term outlook. The leverage of the ETF is reset every day, so it will produce compound returns when held for multiple periods. As mentioned earlier, investors with low risk tolerance or holding buy strategies should avoid using this fund.

The comments, opinions and analysis expressed here are for reference only and should not be regarded as personal investment advice or advice on investing in any securities or adopting any investment strategy. Although we believe that the information provided here is reliable, we do not guarantee its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Due to the rapidly changing market and economic conditions, all comments, opinions and analyses contained in our content are presented on the date of publication and may change without notice. This material is not intended to provide a complete analysis of every important fact about any country, region, market, industry, investment or strategy.

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