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US Energy Sector: Pensive Recovery or Primed and Ready?

September 07, 2021
Traditional energy company plants: Oil, gas and petrochemical refinery factory. power and energy

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

The energy sector has stumbled a bit after recovering to near pre-pandemic levels earlier this summer. With a new White House administration emphasizing renewable energy and uncertainty in the status of global reopening plans, the U.S. energy sector doesn’t exactly know where it’s headed. 

Energy companies see the writing on the wall when it comes to carbon emissions sensitivity and many have released plans to be net carbon zero by 2050. This shift, however, won’t come quickly, and there will be winners and losers along the way. Picking those winners and avoiding the losers can be a lucrative but challenging proposition for traders. Instead, it may make more sense to look at the movement of the energy sector as a whole. Let’s discuss how to track the energy sector and ways to trade it with our 2X leveraged energy ETFs ($ERX – Bull and $ERY – Bear).

There’s an Index for That – Energy Sector Index - IXE

Standard & Poor’s (S&P) Energy Select Sector Index (NDEXSP: IXE) allows investors to gauge the overall sentiment of the energy sector by aggregating 22 of the largest U.S. energy companies into one index. This index reflects the recent consolidation that the energy companies have experienced since the middle part of July. However, the sector is in a longer-term uptrend, riding the post-pandemic recovery wave. 

Therefore, bullish investors may see this consolidation as a good entry point, believing that energy is poised for continued upward movement into the fall. That bullish sentiment is further bolstered by lenders who seem happy to continue lending to energy companies, believing that the second half of 2021 will see a generous uptick in energy consumption as reopening efforts continue to drive demand. 

Trade the Energy Sector: 2X Energy ETFs – Bull (ERX) and Bear (ERY)

For traders who embrace risk, and are looking to make this bullish play, there is Direxion’s Daily Energy Bull 2X Shares (ERX). This exchange-traded fund (ETF) is based on the S&P Energy Select Sector Index and gives traders 2 times daily leveraged exposure to the top names in U.S. energy production. For the bears, there’s its counterpart, the Daily Energy Bear  2X Shares (ERY).

Leaner and Cleaner Energy is the Name of the Game

Looking ahead to the future of energy production, there’s no mistaking that changes are looming on the horizon. Energy companies across the board will need to be both leaner and cleaner. This means investing capital into partnerships and joint ventures with clean energy companies as well as innovating internally. Business models will also change. As the need for efficiency grows, digitalization will be an increasingly important driver in that process. 

One great example of these trends is Phillips 66 (NYSE: PSX), a member of the S&P Energy Index. Phillips 66 recently announced an investment into Novonix (OTCMKTS: NVNXF), an Australian-based materials supplier for lithium-ion batteries. In a press release, Greg Garland, chairman and CEO of Phillips 66 said, “This strategic investment enables Phillips 66 to directly support the development of the U.S. battery supply chain.” Such innovation and vision from members of the S&P Energy Select Sector Index is a good indication that these companies don’t plan on staying stagnant as the ground shifts below them.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

ERX Top 10 Index Holdings (as of 06/30/2021) %

Exxon23.76
Chevron Texaco20.08
Conocophillips4.65
EOG Resources4.47
Schlumberger4.44
Marathon Petroleum4.18
Pioneer National Resource4.09
Phillips 664.08
Kinder Morgan3.86
Williams3.50

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

The “Energy Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Energy Select Sector Index.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

Distributor for Direxion Shares: Foreside Fund Services, LLC.

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