Leveraged Oil And Gas ETNs Dominate Inflows In March
Oil has been making headlines over the past one and a half years owing to huge swings in its prices. Oil prices took a U turn after touching a 12-year low this February. This is especially true as oil broke its near-term trading range and regained momentum, indicating that the worst might be over for the commodity (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs ). Notably, WTI crude surged near the $39 per barrel mark earlier this month while Brent jumped to more than $41 per barrel. However, prices retreated a bit over the last couple of trading sessions. With this, both WTI and Brent are up more than 6% since the start of March. Meanwhile, after touching a 17-year low on March 3, natural gas prices have also rallied so far this month. This shift made investors put huge amounts of money in oil and gas ETFs/ETNs that are wonderfully undervalued at current levels. In fact, these ETFs have seen the biggest asset inflows so far this month with the two ultra-popular ETFs – the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) and the VelocityShares 3x Long Natural Gas ETN (NYSEARCA: UGAZ ) – accumulating nearly $9.3 billion and $6.8 billion, respectively, as per ETF.com . Oil Rebound in the Cards? The latest boost in oil price came with improving demand/supply trends. Talks of production freeze from giant oil producers including Russia and Saudi Arabia had been among the rally’s biggest drivers. Meanwhile, disruptions in supply in Iraq and Nigeria have led to a tightening of supply, which albeit is short term (read: Oil ETFs in Focus on Oil Output Freeze Talks ). Signs of decreasing production can also be seen in the U.S. With oil drilling activity falling in the country, output is expected to continue to decline in the coming weeks. However, increasing production in Iran, a strong dollar and weak global economic growth could lead to further swings in oil prices. Given the uncertain backdrop for oil, investors are seeking to make quick profit from the current trend. UWTI with a leveraged factor of 3 times has been in demand this month. This popular leveraged fund targets the energy segment of the commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $10.62 billion in its asset base. The fund charges a higher fee of 1.35% per year and trades in high volume of 7.5 billion shares. UWTI accumulated almost 88% of its AUM in March so far and is up about 16.2% over the same time frame. In the natural gas world, UGAZ with AUM of $7.08 billion tracks the performance of S&P GSCI Natural Gas Index ER with a leveraged factor of 3 times. The fund also charges a high fee of 1.65% per year and trades in volumes of 1.2 billion shares. UGAZ has accumulated almost 96% of its AUM in March and has gained 11.6%. Investors should be careful while investing in leveraged exchange-traded notes (ETN), as these use derivatives instruments to amplify the returns of the underlying index. While this strategy is highly effective in the short term, their long-term performance could vary significantly from the actual performance of the underlying index due to a compounding effect. Link to the original post on Zacks.com