What a rude of awakening today. Oil went below $70 a barrel and the ultra short ETF for Oil & Gas, DUG loss more than 16%. How can that be, one might ask (well, I certainly asked.) After checking out what the holdings are in the DIG, the long ETF for Oil & Gas (inverse of DUG), I discovered the disadvantage on using the DIG and the DUG to play the oil.
First of all, if you think the DIG and DUG is a direct play on oil, you are wrong. If you want to play the oil directly using ETF, then USO is the one to trade. The USO invest in the NYMEX future contracts on the West Texas Intermediate sweet light crude oil. Therefore, if oil prices go down, USO will go down, and vice versa. But, the DIG does not invest in oil directly. Instead, it invest in the stock of oil and gas companies such as XOM, CVX, SLB, COP, etc. And the four stocks that I just listed represent over 60% of the DIG holdings. If the stock price of these oil companies goes up, DIG will go up and DUG will go down. Similarly if the stock prices of the stock holdings in DIG go down, DIG will go down and DUG will go up. As one can see, DIG will go up and down in regardless to the actual price of a barrel of oil. Of course, the oil prices will have influence to the stock prices of the stock holdings in the DIG. But there are time that it will not. Furthermore, the percentage of the price movement also does not correlate between the DIG and the oil prices. One good example of this is what happened to the DIG & DUG today. The energy stocks rallied today, XOM gained more than 11% and CVX gained over 5%. Since XOM and CVX are two of the top weighted stocks in the DIG, these price gains caused the DIG to go up 16% and caused the DUG to lose over 16%. At the same time, the price for a barrel of oil went below $70 a barrel by moving down over $2.00. If you were looking for DUG to move up because the price of oil went down today, you were greatly disappointed.
So beware of the disadvantages if you plan to use DIG or DUG to play the oil. It is not what you think it is.
