so it is the morning of July 7th, and a barrel of crude oil is going for $50.52 USD. I don’t know if this is close to the bottom or not, but I’m young, and I’ve got a long time horizon, so I’m jumping in on a long 3x levered crude oil ETN. Anyone have views/reasoning for oil in the next 6 months to a year?
Long view: Oil is a finite resource, Middle East is a shit show and can explode any time. China might stimulate their economy and buy all the oil. In fact, any kind of geopolitical event will probably result in people hoarding oil. US dollar is very strong, and makes it cheaper for you to buy oil (edit: sorry, I noticed you are Canadian).
Short view: There is a huge US supply glut. Improving drilling technology has created new sources of oil. China might fall into recession. Saudi might decide to protect market share again. There is no fundamental “risk premium” in oil, like there is in equities - so E[R] should theoretically just be inflation.
A levered crude oil ETN sounds like a spectacular way to blow up this trade in the long-run.
If you want to be long oil as a long term investment, a 3x leveraged ETF is not the way to do it. Those vehicles are intended for short term trading, not long term investments. For proof, just compare the returns of UWTI to the return of Brent crude over the same time frame. Since UWTI’s inception in Feb '12, it is down 96% whereas Brent is down 53% over the period.
This is due to the fact that a leveraged ETF magnifies returns daily, not weekly or monthly or annually. As a simple exercise, pretend you have an index that starts at 100 and alternates between gaining 10 points and losing 10 points each day. At the end of 30 days, the index is still at 100. But if you set up a proxy for a leveraged ETF starting at 100, and multiply it by 3x the % change of the index each day, then the 3x leveraged ETF will be worth 43 after thirty days.
Another thing about levered ETN or ETFs is that - if the underlier trades sideways, you end up underinvested when the underlier price is low. In other words, (1+r)(1-r)(1+r)(1-r)… > (1+2r)(1-2r)(1+2r)(1-2r)… In other words, expected return from the levered strategy is negative if the underlier stays at about the same price.
Edit: I think the other guy also mentions this.
I’m not betting the farm, I only put $2k into it - my buy price was 1.94, and it’s going for 1.88 as I write this - so i’m down $45 right now, plus the trade fee, of course. I’m patient though - I can wait for a recovery, and I can afford the loss too, if worse comes to worse and the long term range of the past decade does not come back.
Also as galli mentioned, it is a spectacular way to amplify returns, if things go your way. if not… well… the opposite.
In the industry, we affectionately refer to 3x levered ETFs as “noob grinders.” I would strongly advise you not to participate in those ETFs under any scenario.
I only have 3% of my book in energy but wow sector returns for small cap energy are sucking a fat one. Avoid upstream. Buy low debt, non-shale, assets that have the ability to compound earnings over a multi-year time period. Widget suppliers who make wear parts for midstream and downstream are my favorite place to be. There are some amazing values out there right now for patient investors.
On a side note:
Very wow… long healthcare or GTFO.
Lower. Patiently waiting…
How do you guys feel about the USO ETF?
Any opinions on FMSA? They’re trading 60% below their October IPO price but the majority of the issue seems to be their industry performance, not their own performance. They had solid earnings in Q1 despite the shit show that was going on elsewhere in the industry. At under $7/share, it seems like a decent buy and hold, but I felt that way at $9-$10 a share in Nov/Dec.
go UCO cuz
^ Hmm, but isn’t this one of those wacky levered ETFs?
only 2x…
I love a good busted IPO but this is levered and investors are selling anything in energy with debt. I’m going to wait it out. My favorite stock now is cash. This market appears very sick to me.
Thanks. I’m admittedly partially drawn to them because they used to operate as FML holdings. What better way to piss away your kids college fund?
It works if you make the call correctly. DWTI is a triple levered inverse fund, and if you bought it a year ago, you’d be up 364%. And what are you talking about “we the industry”? You and your buddies at whatever place you happen to work are “the industry”? I just asked 3 seperate research analysts if they could tell me what a “noob grinder” fund is, and none of them have ever heard that term before, and only speculated that it would be a hype investment of some sort. So your advice to “not participate under any scenario” is completely stupid because as I’ve demonstrated with DWTI, there obviously are scenarios where it is extremely profitable - that’s just a fact, it’s not an opinion - unlike your so called professional advice.
The key to investing is to not lose money. If you simply don’t lose money and you make reasonable investments, you will compound exceptionally well over long periods of time. The Russell value index is up ~70x since I was born. That is a fantastic rate of return by any standard. You don’t need to take unreasonable risks in extremely levered day trading vehicles.
Play with these for a few years and come back and tell us how you did. My guess is you will be down.
Fair enough, but your statement with respect to “under any scenario” was still inaccurate - what you’re saying here is different - that it’s not worth shooting for the gains given the volatility of it. Fair point, but a different one. I agree that this is a high risk instrument, which is why I only put about $1450 USD into it. I also think within 6 months to 5 years, we’re going to see oil prices above the $50 range. I’m young and I have time to wait for that.
Sigh.
It’s not different to me. People should avoid those under any scenario. You, specifically, should avoid them.
Clear?
Also, lol at $1450. Yeah okay, with a $1,450 E-Trade account I could invest in penny stock frauds and make money. That doesn’t mean it’s a good idea. Don’t lose your money just because you are young, it will mess up your compounding.