Oil/Energy ETFs

tallows

Hi,

like a lot of people I'm expecting Oil/Energy prices to rebound strongly at some point in the next few years, and am looking to make a medium-term investment. I've done a bit of research on ETFs and have a few questions.

The first one might seem a bit stupid, but am I right in thinking that ETFs work in the same way as shares, in that if I buy, say, £100 worth of ETF stocks at $20.00 and sell them all at $40.00 then I will have doubled my money (minus brokerage/account management fees)?

If so, then the only way to lose all your money is for the ETF price to hit £0.00 - is this even possible?

Finally, I understand that past performance is not necessarily indicative of future results, and that leveraged ETFs are extremely volatile on a day-to-day basis, but looking at the UK ETFS Leveraged Energy ETF (LNRG), it hit a high of 92.72 last year and is now at 5.85...if you believe that energy prices will rebound at some point and have the cash, why would you not want to invest in this? I understand that contango eats into gains, but still?

Thanks in advance for any replies.

wombat42_2

Ive heard various opinions about an oil rebound, with a rebound mooted for starting somewhere between Q4 this year and Q4 next year and a big spike probably in 3 years time to something in excess of $200.

The ETFs just relect the oil price so they are hardly going to go to zero. But short term the oil price may actually drop as low as $30 and expect a lot of volatility.

You might consider holding fire for 6 months.

sabretoothtigger

The leveraged funds probably buy future contracts and all sorts to exaggerate the market movements, I think you could lose alot of money on those and Im told they are for day trading only

Sounds like you should just go with a normal etf to me and it seems a reasonable thing to hold long term though I dont think you get a dividend like shares in bp would give

wombat42_2

Invested Global Energy Fund looks quite interesting covering Oil and Gas.
http://www.h-l.co.uk/funds/security_details/sedol/B049P96

tallows

sabretoothtigger wrote: »

The leveraged funds probably buy future contracts and all sorts to exaggerate the market movements, I think you could lose alot of money on those and Im told they are for day trading only

Thanks for the reply. I don't see how you could lose money on this fund unless energy prices fall again and never recover though. As a new poster I'm not allowed to post a link to its chart, but the fund seems to have been launched in March last year at 50, peaked just over 90 at the height of the oil bubble and bottomed out around 5 since the bubble burst. I don't see how over the medium term the price can get much lower, and why it wouldn't get much higher when energy prices recover.

jon3001

The case against leveraged ETFs:
http://seekingalpha.com/article/35789-the-case-against-leveraged-etfs

tradetime

tallows wrote: »

Thanks for the reply. I don't see how you could lose money on this fund unless energy prices fall again and never recover though. As a new poster I'm not allowed to post a link to its chart, but the fund seems to have been launched in March last year at 50, peaked just over 90 at the height of the oil bubble and bottomed out around 5 since the bubble burst. I don't see how over the medium term the price can get much lower, and why it wouldn't get much higher when energy prices recover.

I would study up very carefully on leveraged ETF's as they don't work the way most people expect, they are primarily designed for intraday trading and are reset on a daily basis, over a period of time, especially in a volatile market it is possible to actually lose money on a leveraged ETF even though the underlying has moved in the direction you wanted, there are many more articles explaining this on the site that jon3001 has provided a link for. Also be aware that many of the ETF's that trade in oil are in fact ETN's. An ETN is a debt instrument and carries counterparty risk, it's price can be affected by the credit worthiness of the issuer. My advice fwiw, if you are doing anything more than intraday, or at the absolute most, a couple of days then stay away from leveraged products.