ETF Pick of the Week: ProShares UltraShort Oil & Gas

Last Friday’s pick, The New Ireland Fund (IRL), is up 6.5% in less than one week.

Here's my ETF pick for this week:Pro Shares UltraShort Oil & Gas ETF (DUG)

This week's pick is a play on oil prices continuing to decline. Oil prices, while still up 40% this year, settled sharply lower for the second time in a row Wednesday, leaving crude more than $10 cheaper in just two days of frenzied trading and prompting speculation that the hard-charging market may be running out of steam. The bounce in oil prices today is normal given the weakness earlier this week.

This ETF seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be inverse to those of the index. It may employ leveraged investment techniques in seeking its investment objective.

Reasons for Selection:

1) Trading activity, including failure to pierce $150 barrier and high volatility points to markets that are struggling to keep the price momentum that has spurred prices higher this year.

2) Higher prices at the pump have lead to a 2.3% in decline in U.S. demand for gasoline and a Mastercard survey showed demand fell 5.2% last week compared with the same period a year earlier. Inventories of a variety of crude-derived products are also above expectations.

3) In Europe the pullback in demand is even more pronounced. German fuel demand in May was 17% below the same period in 2000. Throughout Europe this year, Mercedes sales are flat while Smart car sales surged 30%.

4) Overall slowing of global economic activity should lead to lower demand for oil products.

Catalyst: Oil price momentum has been reversed this week.

Risk Factor: Aggressive

Tip: Use this ETF position sparingly (2%-3% of portfolio) as a hedging strategy. A 6% stop loss strongly recommended. Remember that this ETF moves double to the inverse of the Dow Jones U.S. Oil & Gas index.

Comments

[Stockguy456]

Great article! Thanks

[masscraft]

I buy into this while oil is rising. When it looks like its going the other way, I buy DIG which moves double to the Dow Jones U.S. Oil & Gas index (not the inverse). Between the two, you can play oil both ways.

[DaveW]

I disagree with this selection. DUG/DIG follow oil "company" equities, not the price of oil. Therefore, they do not have an optimal correlation with the price of oil. A quick comparison of DBO or OIL charts with these ETFs will verify this point. A better way to play the price of oil up/down are the MacroShares ETFs UOY/DOY. Moreover, they behave in a 'leveraged' way: here's a link to Brad Zigler's description of the two ETFs:

seekingalpha.com/artic...

[AmesTiedeman]

We pounded the table when this was 26 bucks.

[Mosh]

The DUG entry was at $26-$28. I wouldn't buy it here becuase it's getting too risky. It tracks an index not a stock. The rally is commodities only taking a pause, it didn't end by no mean.

[mangolfer]

The oil price is definitly faltering. The attempt to support price with news is losing alot of credibiltiy. The demand of oil is dropping fast and will continue to drop globally. I just don't see the oil price going up anytime soon.... I bought in at $31.

[AmesTiedeman]

Mega move..Too far too fast..Oil blips up..

[win]

Consider USO Puts. Also, I have a hard time seeing Oil not trying to rebound. I think WTIC will hit resistance at 133, when I am looking to short USO.

[BrunoT]

1. Oil demand is a worldwide one. So what if US demand drops 2.3% or whatever if world demand in the same time rises faster than that?

2. This type of pick is not investing, it's not even trading. It has a reasonable chance of success. But the same goes for it blowing up in your face. You might as well make your pick of the week "play black on the roulette wheel".

I would love to see these prognosticators forced to list every single winner and loser in a column before they're allowed to recommend anything. Because all I ever see them crow about is their winners. (Jim Cramer is the classic example of this)

[samadams]

Amazing, someone would short an asset that's in a long term bull market
I'll take the other side of that and will be adding to my holdings and not playing Russian roulette. Oil may decline slightly or trade sideways for a week or two but it will finish the year much higher-we're just getting warmed up

[samadams]

I thought the oil bears went broke when oil hit $70--the rest of you wont be around long if you keep shorting

[bruno12]

Watch out for UOY and DOY. Their predecessors, UCR and DCR were terminated early because the price of oil stayed over a certain level for 3 days. DCR owners got wiped out.

[bruno12]

New Up/Down Oil ETFs Open for Business
Thursday July 3, 11:10 am ET
By Tom Lydon

Tom Lydon (ETF Trends) submits:
Just as two ETFs tied to the price movements of oil reached their termination triggers and closed on June 25, two more will be entering the market space to replace them.
MacroMarkets launched MacroShares $100 Oil Up (AMEX: UOY - News) and MacroShares Oil Down (AMEX: DOY - News) yesterday. These funds are the second products from the provider.

The previous funds - MacroShares Oil Up (CDNX: UCR.V - News) and MacroShares Oil Down - had a termination trigger built in that stated if the price of oil stayed at or above $111 a barrel for three consecutive days, the funds would terminate. As we all know, oil is well above that price point now and, and the trigger was set off on April 16.

As outlined in the prospectus, the net asset value [NAV] will be returned to investors. Investors in UCR will receive the full value, while DCR investors will receive nothing.

MacroMarkets President and CEO Sam Masucci says the first two funds were a big success in their 18 months of life, gathering $1.5 billion in assets and trading 17 million shares a day at their close on June 25.

Just as their predecessors had been, UOY and DOY are paired products that track the price movements of West Texas intermediate oil. The starting price for a share is $25, representing one-quarter of the benchmark oil price. As the price rises and falls, assets are transferred back and forth dollar-for-dollar between the Up and Down trusts.

The termination trigger for the new funds is $185 a barrel.

[sbenard]

Deutsche Bank has created the first short and ultra short crude oil ETFs, none of which I've seen mentioned in this article. Another poster accurately mentioned that DUG shorts oil (& GAS) COMPANIES, not oil itself. Keep in mind also that oil and gas do not always move in the same direction.

The DB ETNs, on the other hand, short OIL, and oil ONLY! They also provide a way to increase the leverage of falling oil. Personally, I am still convinced that this oil pull-back is temporary. Last summer, crude oil pulled back, but then rocked higher to $100 before Christmas, and the rest is history...

The DB tickers for shorting oil are DTO (leveraged) and SZO. They are only about a month old, but have grown explosively. DTO is already close to 1,000,000 shares a day, and sometimes 2-3 times that amount.

DB also offers two long oil ETNs -- DXO (leveraged) and OLO.

[bruno12]

I'm staying away from ETN's because of the credit risk. I don't want to worry about the stability of the financial institution backing the ETN. There is enough risk trying to predict the price of oil or any other commodity.