Introduction to Direxion Daily Energy Bull 2X ETF (ERX)

Direxion Daily Energy Bull 2X ETF (ERX): An Overview

Direxion launched the bull and bear lines of the Daily Energy Shares 2X ETF in November 2008. The $253 million AUM Direxion Daily Energy Bull 2X (ERX) is a leveraged ETF that aims to reproduce 200% of the daily returns of the S&P Energy Select Sector Index (IXE). In other words, for every 1% gain in the underlying index, ERX attempts to produce a corresponding 2% gain.

Prior to March 31, 2020, ERX attempted to produce a corresponding 3x gain.

Key Takeaways

• For traders looking for exposure to the energy sector, the Direxion Daily Energy Bull 2x ETF (ERX) can provide 200% returns.
• Because it uses leverage, it is not intended for long-term holding, but rather a tool for short-term positioning.
• Prior to 2020, the ERX sought a 3x return. Today it is a 2x return ETF.

Direxion ETF Characteristics

ERX is an open-ended fund offered through the Direxion Funds family and advised by Rafferty Asset Management, LLC. Like most double-leveraged ETFs, ERX is actively managed and can come with high costs. Its expense ratio of 0.90% is higher than a typical standard ETF’s but relatively in line with the industry average for a leveraged and indexed ETF. Fund expense ratios do not include brokerage fees or other trading expenses.

To achieve its correct leverage, ERX also invests in financial instruments not found in the IXE portfolio. These instruments can include derivatives like futures contracts, forward contracts, options on securities, equity caps, floors and collars, swaps, short selling, reverse repurchases, and other ETFs.

Direxion is a renowned provider of leveraged and inversely leveraged ETFs, particularly in the double-leveraged space. Its expense limitation arrangement with Rafferty Asset Management extends to all of its fund offerings, which is particularly suitable for investors who prefer actively managed and high-turnover instruments.

ERX Fund Holdings

ERX is an energy ETF that is almost entirely invested in domestic companies in the energy sector. Approximately 91% of the fund is weighted toward Oil, Gas, and Consumable Fuels companies, while the remaining 9% is allocated toward Energy Equipment and Services. The fund’s top holdings include:

• Exxon (23.15%)
• Chevron Texaco (15.37%)
• Conocophillips (8.14%)
• Williams (4.60%)
• Eog Resources (4.53%)

Suitability and Recommendations

ERX allows investors to magnify potential short-term gains through its use of 2x leverage. As it seeks to reproduce daily performance, ERX is structured as a short-term fund and is not designed to track its underlying index for periods longer than one day.

All investments come with risk, but leveraged ETFs can be particularly risky. Any shareholder of ERX or its inverse, the Direxion Daily Energy Bear 2X Shares ETF (ERY), has exposure to a degree of market risk and volatility that greatly exceeds that of most equities. As such, these ETFs should only be considered by investors who understand leverage risk and know how to manage this risk in their portfolio.

Due to its heavy weighting in the energy sector, ERX’s performance is highly dependent on oil and gas prices. Investors should closely monitor the price of energy commodities and energy commodities futures.

What is a Leveraged ETF?

A leveraged ETF uses debt and financial derivates to achieve financial returns greater than an underlying index, fund, or currency. Most leveraged ETFs aim to achieve 2x or 3x daily returns compared to their underlying assets.

What is an Inverse ETF?

An inverse ETF is a fund that is designed to perform opposite to its underlying index. For example, if a particular index falls 10%, an inverse ETF that tracks the index should increase approximately 10%.

Who Should Invest in ERX?

As a leveraged energy ETF, ERX is not suitable for all investors. In general, only investors who understand leveraged funds and have a high appetite for risk should actively trade ERX and other leveraged ETFs. It’s not designed as a buy-and-hold fund, which means investors will have to actively monitor their position to know when to submit buy or sell orders.

The Bottom Line

In general, a 2X ETF is only meant for investors who have experience with leveraged instruments and are comfortable consistently monitoring their own portfolios. ERX is not a buy-and-hold play and is not suitable for fixed-income investors. It has a large bid/ask spread and does not have a consistent yield.

ERX has a track record of large upswings and downswings and is risky due to its leverage. Its beta is around 4.5, meaning that it is nearly 5x more volatile than the S&P 500 index. This could serve as a nice satellite holding for competent investors, but it should never make up the core of a balanced portfolio.