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Incorporating The Volatility Risk Premium Into Portfolios

By Wei Ge, Ph.D., CFA, Senior Researcher, Parametric This is the third paper in a series that Parametric has published on the VRP. The first paper discusses the sources of the volatility risk premium, explaining that the VRP may come from three distinct sources: behavioral biases, economic factors, and structural constraints faced by investors (Ge [2014]). The second paper compares the three most common ways to monetize the VRP, all of which utilize financial derivatives: option strategies, variance swaps, and VIX Index futures (Ge [2015]). It concludes that investors may seek to harvest the volatility risk premium with either a dedicated capital allocation or an overlay strategy and suggests that using equity index options may be the best approach for investors to monetize the VRP, closely followed by utilizing VIX Index futures. The focus of this paper is to discuss how investors can incorporate the VRP into a balanced portfolio (60% equity/40% fixed income portfolio) or an equal-weight multi-asset diversified portfolio. Both dedicated VRP allocations and overlay VRP constructs are used to harvest the VRP, as suggested by the prior study. The paper concludes that both methods can potentially enhance investors’ portfolio returns as the VRP is an attractive and traditionally untapped source of returns that has low correlations with traditional risk premiums. Both approaches are shown to provide return enhancement without having to materially alter the risk profile of an investor’s portfolio; though the overlay approach potentially does so in a more capital-efficient fashion. Therefore, when permissible, investors may want to consider utilizing an overlay strategy as a potential method to pursue improved portfolio returns. Otherwise, investors may still enhance their portfolios’ returns by incorporating the VRP via a dedicated vehicle. DATA AND METHODOLOGY This study analyzes the VRP in the context of two scenarios typical of investors’ portfolios. The first scenario is a balanced portfolio consisting of 60% equity allocation and 40% fixed income allocation (the 60/40 Portfolio). Investors usually invest in a mix of equity and fixed income to balance two major objectives of their portfolios, to match liability requirements and to grow assets. The 60/40 Portfolio is the perennial model portfolio for analyzing an investor’s asset allocation as it should offer investors the growth prospects of equities and the stability of fixed income assets (Ambachtsheer [1987], Bernstein [2002]). Some have further suggested using a more dynamic allocation approach (Inker and Tarlie [2014]; Xiong et al. [2013]) to enhance the basic 60/40 portfolio. The 60/40 portfolio is considered by most practitioners a solid model portfolio representing the basic structure of portfolios. In this study, the 60% equity allocation is represented by the S&P® 500 Index and the 40% fixed income allocation is represented by the Barclays Capital Aggregate Index. Twenty-five years of annual return data is used in this scenario (Jan 1990 to Dec 2014). The second scenario is an equal-weight multi-asset portfolio ( the Diversified Portfolio), consisting of five sleeves with equal 20% capital allocations in five different asset classes, including: Equity – S&P 500 Index Treasury – Barclays US Total Treasury Index Credit – Barclays Capital Credit Index Commodities – Bloomberg Commodity Index Real Estate – FTSE EPRA/NAREIT Real Estate Index This scenario is intended to model generic diversified portfolios of investors that are less focused on equity. The Diversified Portfolio includes five different asset classes: equity, treasury, credit, commodities, and real estate 1 . Twenty-three years of annual return data is used for this scenario (Jan 1992 to Dec 2014), with the shorter date range due to lack of data for some of the constituent asset classes (e.g. commodities). In this study, a static asset value-based allocation is used to make the scenarios simple. The conclusions and lessons drawn from this study can be readily applicable to more sophisticated portfolios with more asset classes, such as absolute return assets, hedge funds, private equity, foreign allocations, or portfolios constructed using algorithm-driven methods. As suggested by our prior study, option-based strategies can be used to add exposure to the VRP for the model portfolios. Both the overlay strategy and the dedicated allocation approach are tested in this study and they are constructed as follows: The Dedicated VRP Construct – 50% S&P 500 Index exposure, 50% Treasury Bills, and a short strangle consisting of shorting S&P 500 Index puts and calls layered on top of the base assets. Both short positions of put and call options are explicitly and fully collateralized by the underlying S&P 500 Index and Treasury Bills and have notional values equal to the S&P 500 Index or Treasury Bills allocations. When incorporated into a portfolio, assets must be reallocated from other assets to the Dedicated VRP Construct. The Overlay VRP Construct – a short strangle based on shorting S&P 500 Index options with equal notional values 2 . Unlike the Dedicated VRP Construct, the short puts and calls are implicitly collateralized by the equity and fixed income allocations in the base portfolio. The Overlay VRP Construct does not require capital allocation and can be added on top of existing portfolios. In this study, 10% or 20% of the Dedicated VRP Construct allocation is used for both the 60/40 and Diversified portfolios. The equivalent level of the Overlay VRP Construct, short strangles consisting of 5% and 10% of call and put selling (totaling 10% and 20%) are added to both scenarios to test the overlay strategy. The weights of the Overlay VRP Construct are designed to compare with the Dedicated VRP Construct allocations based on equal footing. The results with dedicated allocations or overlay strategies are compared with the original scenarios both visually and quantitatively. RESULTS Figure 1 examines the performance statistics of the variations of the 60/40 balanced portfolio. From Jan 1990 to Dec 2014, the S&P 500 Index delivered an average annual return of 9.62% with a standard deviation of 14.64%, translating into a 0.45 Sharpe Ratio. The Barclays Capital Aggregate Index delivered an average return of 6.49% with a standard deviation of 3.67%, translating into a 0.95 Sharpe Ratio. The 60/40 Portfolio delivered an average annual net of fee return of 8.29% with a standard deviation of 9.08%, translating into a 0.62 Sharpe Ratio. It has a maximum drawdown of 32.53%. The performance of the 60/40 Portfolio falls between the two constituent series. The variations with the Dedicated VRP Construct allocations are named the “55/35/10” and “50/30/20” portfolios, respectively, with 55% or 50% S&P 500 Index, 35% or 30% Barclays Capital Aggregate Index, and 10% or 20% allocations to the Dedicated VRP Construct. The 55/35/10 portfolio delivered an average annual net of fee return of 8.52% with a standard deviation of 9.06%, translating into a 0.64 Sharpe Ratio. The 50/30/20 portfolio delivered an average annual net of fee return of 8.74% with a standard deviation of 9.06%, translating into a 0.67 Sharpe Ratio. The Overlay VRP portfolios, with the same 60% S&P 500 allocation and 40% Barclays Capital Aggregate allocation as the base, and the Overlay VRP Constructs consisting of 5% or 10% call selling and put selling (totaling 10% and 20% and named “Overlay 10” and “Overlay 20,” respectively), have similar levels of risk and maximum drawdown, but the annual net of fee returns improved to 8.69% and 9.10%, translating into Sharpe Ratios of 0.66 and 0.70, respectively. Figure 1: Adding VRP to the Simulated Balanced Portfolio (Jan 1990 – Dec 2014) Click to enlarge Source: Parametric, 9/10/2015. STD is the annual standard deviation of the returns; SR is the Sharpe Ratio; Max DD is the maximum drawdown based on monthly returns; Beta is the regression beta against the S&P 500 Index. Net of fee returns have a 35 bps management fee and are net of expected transaction costs. Simulated performance is for illustrative purposes only, does not represent actual returns of any investor, and may not be relied upon for investment decisions. Actual client returns will vary. All investments are subject to loss. You cannot invest directly into indexes. Please refer to the Disclosures included at the end of this material for additional important information. The simulated performance statistics indicate that adding the VRP into a balanced portfolio indeed improves the back-tested annual net of fee returns, from 23 bps and 45 bps for the Dedicated VRP Construct allocations to 40 and 81 bps for the two Overlay VRP Construct examples. The risks of the VRP variation portfolios remain similar to the base 60/40 Portfolio, in both return standard deviations and maximum drawdowns. Figure 2 plots the growth of the wealth of the five portfolios (60/40 Portfolio, two Dedicated VRP variations, and two Overlay VRP variation portfolios). The results confirm the improved wealth-generation capabilities of the VRP-based portfolios, with the VRP overlay strategies delivering better return enhancements. Figure 2: Simulated Growth of Wealth – Balanced Portfolio Without or With the IRP (Jan 1990 – Dec 2014) Click to enlarge Source: Parametric,9/10/2015. Net of fee returns have a 35 bps management fee and are net of expected transaction costs. Simulated performance is for illustrative purposes only, does not represent actual returns of any investor, and may not be relied upon for investment decisions. Actual client returns will vary. All investments are subject to loss. May not invest directly into indexes. Please refer to the Disclosures included at the end of this material for additional important information. Figure 3 examines the simulated performance of the variations of the Diversified Portfolio. From Jan 1992 to Dec 2014, the Diversified Portfolio, consisting of 20% allocations to five asset classes, delivered an annualized net of fee return of 7.09% with a standard deviation of 8.16%, translating into a 0.58 Sharpe Ratio. It has a maximum drawdown of 34.80%. The first variation of the Diversified Portfolio with the Dedicated VRP Construct allocation (Diversified + 10% Dedicated VRP Construct) consists of an 18% allocation to each of the five base asset classes plus a 10% allocation to the Dedicated VRP Construct. It delivered an annual net of fee return of 7.39% with a standard deviation of 7.97%, translating into a 0.63 Sharpe Ratio. The second variation with the Dedicated VRP Construct allocation (Diversified + 20% Dedicated VRP Construct) consists of a 16% allocation to each of the five base asset classes plus a 20% allocation to the Dedicated VRP Construct. It delivered an average annual net of fee return of 7.70% with a standard deviation of 7.81%, translating into a 0.68 Sharpe Ratio. The two variations with Overlay VRP Constructs (Overlay 10 and 20 Portfolios) have similar levels of risk and maximum drawdowns, but the annual net of fee returns improved to 7.50% and 7.91%, translating into Sharpe Ratios of 0.62 and 0.67, respectively. Note again that the exposure to short call and put options is covered implicitly by the allocations to equity and treasury assets. Figure 3. Adding VRP to the Simulated Diversified Portfolio (Jan 1992 – Dec 2014) (click to enlarge) Click to enlarge Source: Parametric, Credit Suisse Hedge Fund IndexesSM, 9/10/2015. STD is the annual standard deviation of the returns; SR is the Sharpe Ratio; Max DD is the maximum drawdown based on monthly returns; Beta is the regression beta against the S&P 500 Index. Net of fee returns have a 35 bps management fee and are net of expected transaction costs. Simulated performance is for illustrative purposes only, does not represent actual products or returns of any investor, and may not be relied upon for investment decisions. Actual client returns will vary. All investments are subject to loss. May not invest directly into indexes. Please refer to the Disclosures included at the end of this material for additional important information. The simulated performance statistics indicate that, again, adding the VRP into a multi-asset diversified portfolio improves the expected overall performance. The improvement net of fees is 30 bps or 61 bps annually with the Dedicated VRP Construct allocations, and 41 bps or 82 bps net of fees with the two Overlay VRP Constructs. The risks of the VRP variation (Overlay and Dedicated) portfolios, again, remain similar to the baseline multi-asset diversified portfolio or even more subdued, in terms of both return standard deviations and maximum drawdowns. Figure 4 plots the wealth index of the five portfolios (the Diversified Portfolio, two Dedicated VRP variations, and two Overlay VRP variations). The performance improvement is most significant for the Overlay 20 portfolio, followed by the Diversified + 20% Dedicated VRP portfolio, Overlay 10 portfolio, and the Diversified + 10% Dedicated VRP portfolio. Figure 4: Growth of Wealth – Simulated Diversified Portfolio Without or With the VRP (Jan 1994 – Dec 2014) Click to enlarge Source: Parametric, 9/10/2015. Net of fee returns have a 35 bps management fee and are net of expected transaction costs. Simulated performance is for illustrative purposes only, does not represent actual products or returns of any investor, and may not be relied upon for investment decisions. Actual client returns will vary. All investments are subject to loss. Please refer to the Disclosures included at the end of this material for additional important information. Simulated statistics of the two scenarios indicate that all the VRP variation portfolios improved the performance of the base portfolios and all have similar levels of risk as the base portfolios, in terms of returns volatility and maximum drawdowns. The return improvements are higher for the Overlay VRP variations than with the Dedicated VRP allocations. Implicit leverage may be a part of the reason behind the superior returns of the overlay approaches. When an overlay VRP construct with zero weight is added on top of a portfolio, an implicit leverage is introduced; it may add extra returns, but may also suffer losses. The addition of the short index option strangle layer on the base portfolio, however, introduces minimal changes to the risk profile of the portfolio, probably due to two reasons. First, the Overlay VRP Construct is implicitly fully collateralized by the equity or treasury allocations in the underlying balanced or diversified portfolios, reducing risks of exacerbated drawdowns. Second, the Overlay VRP Construct with the short index option strangle has an equity beta close to zero and a negative returns correlation with the equity market (Ge [2015]). The portfolio’s overall risk characteristics does not change significantly with the addition of the Overlay VRP Construct, exemplified by the similar standard deviations and maximum drawdown attributes of the variations. Therefore, the overlay approach of incorporating VRP into an investor’s portfolio should be considered the preferred approach if there are no constraints on leverage in investors’ mandates. The addition of the Dedicated VRP Construct allocations does not change the risk characteristics of the base portfolios for similar reasons. The overall performance enhancement, however, is slightly less significant due to the need to accommodate the Dedicated VRP Construct by reducing other assets in the portfolio. This method of incorporating the VRP may be utilized when the client is more risk averse or the overlay approach cannot be used due to legal constraints or mandate requirements. CONCLUSION This the third paper in the series that examines the equity insurance risk premium. This piece focuses on how to incorporate the IRP into investors’ portfolios. It builds on the conclusions of the two previous studies and explores the best method of incorporating the IRP into generic portfolios. Based on the conclusion of the previous study on the best way to monetize the IRP, this study analyzes the use of index option strategies, i.e. shorting S&P 500 Index option strangles, as either a collateralized Dedicated IRP Construct, or as an Overlay IRP Construct. The application of the IRP enhancement is analyzed based on two generic scenarios, one is the typical 60/40 balanced portfolio representative of many investors’ portfolios, and the other is an equal-weight multi-asset diversified portfolio consisting of five asset classes, representing typical portfolios of investors that are less focused on equity. The IRP can be beneficial to investors’ portfolios and the IRP addition in both formats can provide both return enhancement and diversification. The Dedicated IRP allocations improves both scenarios on a net of fees by a roughly annualized 2 to 61 bps while reducing the overall risk levels slightly. The Overlay 10 portfolio improves both scenarios on a net of fees by approximately 40 bps on an annualized basis, utilizing the same short strangle construct as the Dedicated IRP Construct. The Overlay 20 portfolio improves the net of fee return by approximately 80 bps. Neither overlay variation alters the risk profile of the portfolio significantly. The final conclusion is that investors may utilize the overlay approach to incorporate the IRP into their portfolios if legally permissible, by taking advantage of the implicit leverage embedded in the overlay approach, which should deliver elevated returns without significantly changing their risk profile. On the other hand, if the investors are risk averse or are constrained by legal restrictions or mandate requirements from utilizing the overlay approach, the incorporation of the IRP as a dedicated allocation may also be a good choice as it is capable of delivering potentially better returns without introducing significant extra risks. REFERENCES Ambachtsheer K. P. “Pension Fund Asset Allocation: In Defense of a 60/40 Equity/Debt Asset Mix.” Financial Analysts Journal, 43 (1987), pp 14-24. Bernstein P. L. “The 60/40 Solution.” Bloomberg Personal Finance, 2002. Ge W. “A Survey of Three Derivative-Based Methods to Harvest the Volatility Premium in Equity Markets.” Parametric White Paper, Parametric Portfolio Associates LLC, 2015. Ge W. “Understanding the Sources of the Insurance Risk Premium.” Parametric White Paper, Parametric Portfolio Associates LLC, 2014. Inker B, Tarlie M. “Investing for Retirement: The Defined Contribution Challenge.” GMO White Paper, GMO LLC, 2014. Malkiel B. G., Saha A. “Hedge Funds: Risk and Return” Financial Analysts Journal, 61 (2005), pp 80-88. Strohmaier J. “Low Volatility Investing: Expectations & Implementation Implications.” Parametric White Paper, Parametric Portfolio Associates LLC, 2015. Xiong J.X., Sullivan R. N., Wang P. “Liquidity-Driven Dynamic Asset Allocation.” Journal of Portfolio Management, 39 (2013), pp 102-111.

Why Good News And Bad News Are Not Helping Stocks Anymore

Since the Great Recession’s inception, whenever the stock market dropped like a steel anvil or the U.S. economy showed signs of weakness, the Federal Reserve acted to inspire investor confidence. For example, in November of 2008, when the Fed announced its first quantitative easing (QE1) program to buy mortgage-backed securities (MBS), stocks rocketed 10% in two weeks. The enthusiasm wore off quickly. In March of 2009, the central bank of the United States “doubled down” on the MBS dollar amount and simultaneously expanded its reach with a decision to acquire $300 billion of longer-term Treasury bonds. The 1-year program correlated with stock market gains of 70%. Could the Fed have stopped there? At the end of the first quarter in 2010? The Fed could have. However, when the S&P 500 lost 16% over the next few months, committee members began hinting at a second tidal wave of bond buying (QE2). From summertime rumor through QE2 completion in the second quarter of 2011, the S&P 500 pole vaulted approximately 29%. Might the monetary policy authorities have decided, at that juncture, to let financial markets operate without additional interference? At the conclusion of the second quarter of 2011? They might have. Perhaps unfortunately, the S&P 500 responded unfavorably to the end of another Federal Reserve program and the absence of a European bank bailout. A 19% price collapse over a brief span of time compelled the Fed to invoke “Operation Twist” – a program to push borrowing costs even lower through using the proceeds of short-dated Treasury bond maturities to acquire intermediate- and long-dated maturities. The Federal Reserve also orchestrated dollar liquidity swap arrangements that aided European financial institutions with raising capital. Not surprisingly, the Fed-inspired activities helped push U.S. stocks 27% off of the 2011 bottom. “Operation Twist” was scheduled to end in the second quarter of 2012. What could possibly go wrong? This time, investors did not even wait for another Fed program to end, sending stocks down nearly 10% over 8 weeks in April-May. The Fed did not wait either. They extended “Operation Twist” through year-end 2012. And there was more. In an effort to break the cycle of start-stop stimulus dates, and to stimulate a U.S. economy that showed definitive signs of deceleration, the Fed served up hints of its largest quantitative easing experiment yet. The third round of asset purchases (QE3) was not only larger than its predecessors at $85 billion per month, it was open-ended in nature; that is, it came without a formal termination date. Over the next three years, the S&P 500 catapulted roughly 57% with little resistance. Since the last asset purchase by the Fed in mid-December of 2014, however, investors have not been able to rely on the Fed to “ride to the rescue.” On the contrary. Investors have lived with the persistent headwind of overnight lending rate tightening. Granted, the Fed did everything it could to prepare financial markets for an exceptionally slow path to rate normalization. Monetary policy leaders even pushed its first move – a 0.25% increase in the Fed Funds rate – out from the first quarter of 2015 to the 4th quarter of 2015. Nevertheless, once market participants began to fear that the Fed would cease serving as a backstop for falling equity prices, return OF capital supplanted return ON capital. Unless the Fed reverses course back toward zero percent rate policy, and perhaps another round of QE, overexposed investors are likely to sell the bounces. Consider the overexposed participants who leveraged their portfolios on margin. Those who bought stock on margin have leveraged themselves 2:1, having borrowed money to acquire twice as many shares of stock than they would have been able to do otherwise. And while that increased demand for stock shares pushed prices higher on the way up, the need to deleverage accelerates price declines on the way down. How out of whack did margin debt become over the last few years? Margin debt peaks went hand in hand with the stock market tops in 2000 and 2007. Similarly, the margin debt pinnacle in April of 2015 is not far from the nominal high for the S&P 500 in May of 2015. Keep in mind, prominent members of the Federal Reserve like Richard Fisher, have acknowledged front-loading an enormous stock rally to create a wealth effect. What Mr. Fisher did not acknowledge, however, are the back-end issues associated with wealth effect intentions. For instance, stocks that move to exorbitant valuation levels offer less hope for future returns. In the same vein, one should be able to anticipate a wealth effect reversal when a front-loading Federal Reserve subsequently removes its support for ever-increasing equity prices. Don’t be fooled by CNBC’s focus on China or the ticker tape on crude oil. China’s slowing economy may be relevant to U.S. corporate revenue and profitability, but it’s the Fed’s perceived unwillingness to “save stocks” from the volatile sell-off that exacerbates the panic. Oil depreciation may be signaling global recessionary pressures and domestic manufacturer retrenchment. Again, however, it is the direction of the Fed’s rate normalization path, albeit gradual, that has poked the grisly bear in its eyes. Perhaps ironically, the Fed ignored its own projections on economic deceleration in the final quarter of 2015. It raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, even as the Atlanta Fed’s “GDP Now” currently projects 0.6% 4th quarter economic growth. That’s well below the 2.0% annualized growth in the six-and-a-half year economic recovery, where 2.0% had been deemed too anemic for the Fed to fully remove itself from the QE/zero percent rate game. In sum, the U.S. stock market is likely to see little more than bounces and rallies in a bearish downtrend, until and unless the Fed reverses course. In the past, “bad news was good news” because poor economic data solidified ongoing central bank involvement. “Good news was good news” because, well, that meant things were getting better. Today, on the other hand, “good news is bad news” because it might encourage the Fed to tighten rates more quickly. And bad news? That’s the worst of both worlds for risk assets because the Fed is not currently expressing a willingness to head back toward quantitative easing or zero percent rate policy. There have been some safer havens over the last six months, ever since the August-September meltdown for stocks. The PowerShares DB USD Bull ETF (NYSEARCA: UUP ), the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ), the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ), the SPDR Gold Trust ETF (NYSEARCA: GLD ), the CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ) and the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB ) have all gained ground over the last six months. In fact, most of the asset classes in the FTSE Multi-Asset Stock Hedge Index (MASH) – zero-coupon bonds, munis, longer-term treasuries, the yen, the greenback, gold – have appreciated in value. The SPDR S&P 500 (NYSEARCA: SPY ) has not been quite as fortunate. Click to enlarge Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Oil Hits 12-Year Low: Short Energy Stocks With ETFs

No doubt, last year’s chaos in the energy sector has spilled over into this year with many stocks piling up heavy losses in the first couple of weeks of 2016. In fact, the worries have deepened this year with renewed concerns over the slowdown in the world’s second-largest economy and the Iran sanctions’ lift off. This is especially true, as the relaxation in sanctions would add a fresh stock of oil in the global market, which is already facing a supply glut. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), is expected to increase its crude oil exports by half a million barrels a day immediately and a million barrels a day within a year of lifting the ban. Though the Iran sanctions were widely expected and the development of oil in the country will take some time to fully ramp up after 40 years, the move unnerved investors, spreading panic among them. That being said, oil price tumbled to a level not seen in more than 12 years with U.S. crude plunging below $29 per barrel and Brent slumping to below $28 per barrel. From a year-to-date look, oil price has lost more than 20% this year, representing the worst two-week decline since the 2008 financial crisis (read: 4 Country ETFs to Gain from Oil Price Crash ). Trend Remains Weak Currently, the outlook for oil and energy sector seems gloomy. This is because oil production has risen worldwide with the OPEC continuing to pump near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, a strengthening U.S. dollar backed by a rate hike is making dollar-denominated assets more expensive for foreign investors and thus dampening the appeal for oil. In particular, it will make the borrowings for high-yield firms costlier and result in less money flows into capital-intensive shale oil and gas drilling projects. This in turn will lead to higher bankruptcies, which would hit the already battered energy sector. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. The negative demand/supply imbalance would push oil prices and the stocks further down at least in the short term. Moreover, the ultra-popular United States Oil Fund (NYSEARCA: USO ) , tracking the price of US light crude with an asset base of around $2.2 billion and average daily volume of around 32.3 million shares, has hit new all-time lows several times this year. Given the continued sell-off and the bearish outlook, the appeal for energy ETFs is dulling (read: Oil and Energy ETFs That Hit All-Time Lows ). As a result, investors who are bearish on oil right now may want to consider a near-term short on the energy sector. Fortunately, with ETFs, this is quite easy as there are many options to accomplish this task. Below we highlight them and state how each stands out among the rest: ProShares Short Oil & Gas ETF (NYSEARCA: DDG ) This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when the energy stocks decline and is suitable for hedging purposes against the fall of these stocks. The product has amassed $14.1 million in AUM while volume is light at under 10,000 shares. Expense ratio comes in at 0.95%. It has added nearly 10% so far this year. ProShares UltraShort Oil & Gas ETF (NYSEARCA: DUG ) This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging 95 bps in fees. It has amassed $46.1 million in its asset base and trades in good volume of more than 183,000 shares per day on average. DUG returned 19.8% in the first couple of weeks of 2016. Direxion Daily Energy Bear 3x Shares ETF (NYSEARCA: ERY ) This product provides three times (3x) inverse exposure to the Energy Select Sector Index. Though it charges the same annual fee of 95 bps, it is extremely popular and trades in heavy volume nearly 1.7 million shares. The fund has a decent AUM of $74 million and has gained 32% so far this year. Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares ETF (NYSEARCA: DRIP ) This ETF provides three times bearish exposure to the oil & gas exploration and production corner of the broad energy space tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $6.1 million in its asset base while trades in a lower volume of 32,000 shares per day on average. The fund charges 95 bps in annual fees and has gained 62.9% since the start of the year. ProShares UltraShort Oil & Gas Exploration & Production ETF (NYSEARCA: SOP ) This fund seeks two times inverse exposure to the S&P Oil & Gas Exploration & Production Select Industry Index, charging 95 bps in fees. It failed to garner enough investor interest with AUM of just $4.6 million and sees a paltry volume of about 3,000 shares a day. SOP is up 40.6% in the year-to-date timeframe. Bottom Line As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the energy sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Link to the original post on Zacks.com