Bull vs. Bear Oil & Gas Leveraged Exchange Traded Fund: A Rolling Risk-Performance

Abstract

This research aims to capture the risk-performance exposure of 4 of the most popular leveraged energy ETFs: GUSH, DRIP, DGAZ, and UGAZ, which are an attractive investment option when the capital market (shares and bonds specifically) do not perform well due to the inherent uncertainty of the market. We use a rolling window mean-standard deviation model to study the dynamics of three of the principal investment components: volatility, return and market beta (β) over varying horizons of bull and bear Oil & Gas leveraged Exchange Traded Fund (ETF). Leveraged energy ETF provides from 200% to 300% (for bull) and -200% to -300%  (for bear) return based on their benchmark index every single day, allowing to implement strategies where high profits (as well as high losses) can yield tremendous benefit for both parties from market volatility. The results enable the characterization of the dynamics of risk-return of bull and bear leveraged energy ETFs and suggest a more accurate measure for risk compensation. The limitation is that rolling window mean-standard deviation model is not gauged for selecting an optimal timeframe. It only shows the dynamics over different timeframes. The originality is the use of rolling window mean-standard deviation model to improve the analysis of volatility, return and market beta (β) for daily, monthly, and annual data. In general, ETFs are a mechanism for investors to foresee the future structure of energy prices to make decisions about an efficient allocation of resources.