Crude Oil ETFs: Double Down, or Double Up

I received an exceptionally interesting e-mail from a reader recently. The writer explained that he was not an investor. In fact, he described himself as a small-scale gambler.

(Hey... why are you writing me, I wondered. I'm not here to offer up strategies for the craps table.)

SL's inquiry was about the ways in which to profit from a collapse in overdone oil prices and/or a geopolitically-driven price spike. And as you might suspect, he's not the first one to ask me about leveraging a bet on oil's next big move.

Welcome to Oil.com.

As a Certified Financial Planner [CFP] and as the president of a Registered Investment Adviser, I've witnessed the same phenomenon over and over. Let me explain.

I attended a web conference in January of 2000 in New York. At a break, I stepped into an elevator where a mounted television had CNBC on the inside. On the screen, the Nasdaq was up another 100 points. Next to me in the elevator was a young man with a sport-coat and loosely fastened tie. He pumped his fists and shouted, excitedly, "You know it, baby!"

I knew right then that dot-com stocks had become a gambler's paradise. In fact, as the months and weeks progressed, it wasn't long before radio show callers wanted to know how they might "bet against" the dot-coms. Investing in a dot-com company was no longer (and possibly never was) based on whole, or in part, on fundamental value.

I watched the same mistakes being made from 2003 to 2005. There were many exchange-based investors who were pulling money out of accounts to buy more property. There were reasonable people who were asking me what I knew about property rules in Asia and Latin America, in addition to Hawaii, Florida and along the California coastline.

In every instance, I talked about the extended length of the current real estate cycle, NINA loans (no income, no assets), liquidity issues and the out-of-whack price-to-rent ratio. Many tried to convince me that they were investing in additional real estate for the long-term, even if it meant being "cash flow negative" for a period.  It smacked of gambling to "get rich quick." I myself chose to rent from 2005-2007, selling property at $450 per square foot and repurchasing property at $300 per square foot.

So here we are at the next bubble... and yes, oil is in a bubble even if it goes to $200 per barrel. And investors... uh, I mean, gamblers... are looking for ways to get in on the action. (It's not a question of if oil will come down -- speculation legislation, alt energy development, economic demand slowing, drilling, leveraged shorting -- only a question of when.)

For the gamblers with conviction out there, I am going to offer up the latest exchange trader's tools. These are not meant for buying-n-holding; rather, they are meant for making a calculated bet and exiting when you've reached your profit target or stop-loss.

1. PowerShares DB Crude Oil Double Long (DXO). This exchange-traded note backed by Deutsche bank gives investors exposure to 2x the monthly performance of the DB optimum yield crude oil index, plus the monthly T-Bill index return. The annual expense ratio is 0.75%.
2. PowerShares DB Crude Oil Long ETN (OLO). This exchange-traded note backed by Deutsche bank gives investors exposure to the monthly  exposure to the monthly performance of the DB optimum yield crude oil index, plus the monthly T-Bill index return. The annual expense ratio is 0.75%.
3. PowerShares DB Crude Oil Double Short ETN (DTO). This exchange-traded note backed by Deutsche bank gives investors 2x the inverse performance of the DB benchmark crude oil index, plus the monthly T-Bill index return. The annual expense ratio is 0.75%.
4. PowerShares DB Crude Oil Short ETN (SZO). This exchange-traded note backed by Deutsche bank gives investors the inverse performance of the DB benchmark crude oil index, plus the monthly T-Bill index return. The annual expense ratio is 0.75%.

For investors, I remain devoted to commodities as an inflation-fighting asset class. To that end, and for diversification purposes, you get enough exposure to oil in the Dow Jones Total Commodity Index (DJP). You also have exposure to base metals, precious metals, nat gas, livestock and agriculture, all of which present better fundamental reasons for their upside potential.

Stay vigilant, my friends. Use stop-loss protection. (Read more about the Dow Jones Total Commodity Index here.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[paulk8756]

Well done, sir. Get your bets down...!

My personal favorite "oil game" is watching the U.S. Senate. A couple of weeks ago, the domestic pro-drillers got 42 votes (...out of 60 necessary) to explore for more offshore oil and gas. While it is possible they could make up the difference in this November's elections, since only a third of the Senate runs every two years (...and only 12 are Democrats this time), this is highly unlikely.

The House is a different story. All 435 members face re-election every two years, so they are more attuned to the will of the electorate. And they only require a simple majority vote to explore for more domestic energy reserves, as well, which I suspect they have already. Due to the power vested in the Speaker, however, they have managed to dodge a vote on this issue so far, but the time is coming.

Nevertheless, owing to the intransigence of several Senators, it is unlikely the Congress will end our self-imposed boycott on increasing our domestic energy supplies in the near future. Despite attempts now underway to "bundle" bills that may achieve this end by putting more renewables and traditional energy sources together, the anti-explorers are very likely to hold fast at least until they see the outcome of this year's presidential election.

Finally, you probably heard about how trading slowed on the NYSE on the recent Monday that Tiger Woods was on TV winning his 19-hole playoff victory in the U.S. Open. Well, those same people watch the Senate's proceedings live every day. Therefore, it is my "bet" that oil prices won't recede until we see some dramatic movement there on the issue of American energy independence.