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Finance

3 Oil ETFs on the Robinhood 100 to AVOID

Take a look at the Robinhood 100 and you will find some oil ETFs that many “newbie” traders and investors gravitate toward, yet savvy investors are quick to sidestep. This irrational exuberance for oil stocks is a good example of Robinhood traders’ naivete.

Those who closely follow the market are adamant most oil stocks should be traded in a conservative manner, possibly with a covered call or a put option. However, the decline in the price of oil has not discouraged Robinhood traders from moving their cash into oil ETFs.

With that in mind, today I’m going to take a look at three oil ETFs on the Robinhood 100 that investors should avoid: Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH), United States Oil Fund (USO) and ProShares Ultra Bloomberg Crude Oil (UCO).

Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH)

GUSH was trading at $1,600 in January. Today, GUSH is down to $23. This steep decline reflects that of the oil and gas industry as a whole. However, GUSH remains one of the most popular Robinhood ETFs. These green traders’ love affair with GUSH defies logic.

In short, GUSH seeks daily investment results of 200% of the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.  Meaning that this Direxion ETF zeroes in on the gas and oil index related to exploration and production. GUSH gives investors exposure in a leveraged manner with the overarching aim of doubling the underlying index’s return.

GUSH should only be used as a short term trading instrument, as it uses derivative instruments to boost the returns of the underlying index. Each day the ETF needs to buy when underlying asset prices go up, and sell when they go down.  That means the compounding effects of daily returns work against long-term investors.

GUSH has an overall POWR Rating of “F,” which means “Strong Sell.”  It receives a “F” Trade Grade, Buy & Hold Grade, and Industry Rank, and a “D” for Peer Grade.   

United States Oil Fund (USO)

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The USO ETF is best described as a commodity pool that provides units for purchase/sale on the American Stock Exchange. USO is essentially a fund for the speculative buying and selling of oil future contracts along with options for such contracts.

The POWR Ratings show USO has “F” grades in the Trade and Buy & Hold components along with a ranking of 64 out of 111 Commodity ETFs. 

USO was trading at $105 in January and is now at $29.  The futures markets’ disruptions have been problematic for USO. As a result, the fund altered its methodology, adding the potential to track errors.

USO’s year-to-date returns have not aligned with the price behavior of spot crude. However, that has not stopped the 150,000 Robinhood traders who own shares in this ETF. The ETF’s popularity on Robinhood is nothing but a case of irrational exuberance. There is no reason to bet your hard-earned money on oil futures contracts that can be affected by all sorts of variables, many of which are unrelated to the oil market.

The time remaining until expiration, interest rates and other unrelated factors largely dictate the fate of this ETF. There is reason to question whether inexperienced Robinhood traders are aware of such complexities.

ProShares Ultra Bloomberg Crude Oil (UCO)

The aim of the UCO ETF is to achieve results that are twice the daily performance of Bloomberg’s WTI oil subindex. Check out UCO’s POWR Ratings and you will find it has “F” grades in the Trade Grade and Buy & Hold components. UCO is ranked 65th of 111 Commodity ETFs.

Robinhood traders bought UCO assuming it had considerable upside. However, there is no guarantee oil will rebound to its pre-COVID price. If a second wave of the virus emerges, people will remain indoors and the price of oil will decrease even more. Adding salt to the wound is the inevitable reduction in air travel should the pandemic worsen.

The fact that this fund is 2X leveraged is concerning as it will have volatile swings, both up and down, in response to oil price fluctuations. 

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GUSH shares were trading at $23.77 per share on Thursday afternoon, up $0.39 (+1.67%). Year-to-date, GUSH has declined -98.37%, versus a 9.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More…

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