ProShares Extremely Oil & Fuel: Transferring From Promote To Maintain

Thesis

ProShares Extremely Oil & Fuel ETF (NYSEARCA:DIG) seeks each day funding outcomes which are 2x the each day efficiency of the Dow Jones U.S. Oil & Fuel Index. In December 2022 we regarded on the title and initiated protection with a Promote score, anticipating weaker WTI costs and weaker Oil & Fuel costs into the brand new 12 months as recessionary fears would take maintain. This was set-up as a short-term commerce, however sadly it didn’t work to the extent anticipated. WTI did transfer down, however bounced off help at $70:

We anticipated a transfer down right here to a $65 stage. It didn’t materialize, particularly with China ending their zero-Covid policy, and the China re-opening placing upward strain on oil costs.

DIG is a leveraged fund, therefore not a product appropriate for a buy-and-hold technique. Please word that leveraged merchandise are essentially not purchase and maintain investments, and include particular dangers as recognized by FINRA. For us DIG was meant as a brief time period play, and that’s the reason we’re closing the Promote place right here. On this very unstable market leveraged performs might be very worthwhile at instances, if the thesis performs out appropriately.

Prior to now months we have now seen a twin issue transfer: on the one hand oil moved decrease (till the China re-opening) and bond yields additionally retraced considerably. In our thoughts this was precisely a recessionary play by the market – decrease yields and decrease oil costs on the again of decrease anticipated home demand.

Efficiency

Oil and Fuel equities didn’t sell-off as anticipated:

We’ve mapped the Oil ETF (USO) above, in addition to the Oil & Fuel Sector Fund (XLE) together with DIG. The fund did spend a while in adverse territory given its leverage nature, however has now re-bounded. It is very important do not forget that this fund, similar to any leveraged product is to be traded with set entry / exit targets in thoughts. Once more, this title is just not a purchase and maintain title. For us the goal was a $65 WTI value, which did not materialize.

Holdings

The ETF synthetically matches through swaps the Dow Jones U.S. Oil & Gas Index. Its composition is as follows:

We are able to see its composition is kind of harking back to XLE’s, with Exxon (XOM) and Chevron (CVX) accounting for a really massive proportion of the index (over 39% presently). Having a leveraged publicity merely means the ETF gives for 2x of the underlying index returns. Magnified returns work each methods – they will present for very rewarding up years, but in addition can wipe out an investor’s capital throughout down years. Leveraged merchandise are for use as shorter-term buying and selling instruments reasonably than anything.

Speculative Account Positioning

One of many pillars of our thesis was the speculative account positioning in oil:

We are able to see that market individuals who actively commerce the futures market in oil are at very mild historic ranges. Reasonably than a contrarian indicator we had been utilizing this as a number one one – i.e. speculative account positioning in futures goes to drive spot costs.

There are a few forces at play right here – macro sensible, we imagine we’re in a multi-year bull market in power, so power equities are going to do effectively over the upcoming years. Brief-term nonetheless, we do assume the present recession is just not totally priced in. Whereas bond costs/yields are appropriately reflecting a decelerating economic system, oil costs didn’t ‘puke’, however really discovered a pleasant help at a $70 value stage. Contemplating most of the oil and gasoline shares in DIG have break-even costs within the 30s for oil manufacturing, oil equities are nonetheless amassing substantial earnings even at $70 oil.

Conclusion

DIG is a 2x leveraged play on a portfolio of Oil & Fuel equities. We assigned the fund a Promote score in December anticipating weaker oil costs into the brand new 12 months on the again of recessionary fears. Whereas we noticed the expression of that macro development in decrease bond yields, oil obtained a constructive increase from the China re-opening story. From a macro stand-point we do really feel oil is in a multi-year expansionary cycle, however it should have months lengthy down-turns. Our name was additionally motivated by the robust bearish sentiment within the wider fairness markets, with many analysts anticipating a considerable leg down within the January – March interval. These calls didn’t materialize and it appears to be like like WTI oil is constructing a base across the $70 help stage. Given break-even ranges for the underlying equities are within the 30s for oil, the respective enterprises are going to maintain posting wholesome web revenue figures even with WTI oil at $70.