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Geopolitical headlines are one of the ideal catalysts for trading leveraged exchange-traded funds and traders looking to tap geared energy ETFs Monday got the volatility they were looking for.
Oil prices enjoyed one of their best intraday performances in decades following drone strikes on Saudi Arabian oil assets that knocked 5% of the world's daily supply offline. This was good news for traders using bullish leverage oil funds and great news for those that had the foresight and fortitude to hold such products over the weekend.
Conversely, Monday was a forgettable day for traders that held inverse energy ETFs, such as as the Direxion Daily Energy Bear 3X Shares (NYSE:ERY) over the weekend.
ERY is designed to deliver triple the daily returns of the Energy Select Sector Index. The weekend's events in Saudi Arabia notwithstanding, ERY was a risky hold into the weekend because the fund was already down about 21% this month with energy stocks perking.
The triple-leveraged bearish fund was punished Monday, losing 10% on more than triple the average daily volume. That will happen to a leveraged ETF where the underlying index allocates about 43% of its combined weight to Exxon (NYSE:XOM) and Chevron (NYSE:CVX), yesterday's two best-performing Dow stocks.
Making matters worse is that for the 10 days ending Friday, Sept. 13, ERY took in nearly $5 million in new assets, good for the ninth-best total among all Direxion ETFs. In other words, some traders got caught making the wrong bets.
With the benefit of hindsight, it is clear that the Direxion Daily Energy Bull 3X Shares (NYSE:ERX) was the geared energy ETF to hold into the weekend. Interestingly, there has been much in the way of noteworthy inflows or outflows from ERX as of late, but that could change after the fund surged 10.30% Monday on more than triple the usual volume.
If U.S. oil producers look to pick up some of the slack from the lost Saudi output and if that move doesn't force prices lower, ERX could have some legs as a winning bet over the near-term.
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