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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 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 due to an increase in global supply. Earlier this year, the impact of the coronavirus pandemic helped drive oil prices into negative territory.
Key Takeaways
- The best (and only) inverse oil ETF is SCO.
- Oil prices have underperformed the broader market over the past year.
- SCO provides 2x daily short exposure to crude oil prices.
The U.S. inverse oil ETF universe is comprised of 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. By combining both inverse and leverage strategies, inverse leveraged ETFs are especially complex and risky instruments and should be avoided by less sophisticated investors.
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 that trades in the U.S., the ProShares UltraShort Bloomberg Crude Oil (SCO). Oil prices have dramatically underperformed the broader market, falling 27.7% over the past year compared to the S&P 500’s total return of 16.8%, as of November 10, 2020. However, neither the S&P 500 nor the price of oil are proper benchmarks for SCO, since the ETF is designed to meet performance goals over a single day, not over longer periods of time. SCO offers daily short exposure to crude oil prices as opposed to stocks of oil companies. All numbers in this story are as of November 11, 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.
- Performance over 1-Year: 5.1%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 3,389,229
- Assets Under Management: $103.6 million
- Inception Date: November 24, 2008
- Issuer: ProShares
SCO is structured as a commodity pool, a private investment tool structured to combine investor contributions for trading futures and commodities markets. The ETF seeks daily investment returns, before fees and expenses, that are two times the inverse (-2x) of the daily performance of the Bloomberg Commodity Balanced WTI Crude Oil Index, an index of crude oil futures contracts. 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. As mentioned, investors with a low tolerance for risk or with a buy-and-hold strategy should avoid this fund.