DRIP: A Day Trading Tool With A 40% Monthly Return (NYSEARCA:DRIP)

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DRIP: A Day Trading Tool With A 40% Monthly Return (NYSEARCA:DRIP)


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Thesis

The Direxion Daily S&P Oil & Gas Exploration & Production Bear (DRIP) 2X seeks daily investment results of 200% of the inverse of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. The index contains small, medium and large sized E&P producers such as SM Energy, Diamondback Energy and Marathon Oil. With a 1.06% annual management fee and a dreadful 1-year lookback total performance due to its leverage and energy rally, DRIP is to be used as a day trading tool only. Similar to CFDs that are utilized in Europe, DRIP basically offers a sophisticated retail investor the ability to take advantage of a leveraged bearish daily view on the E&P Producers due to various external factors (i.e. let’s say another virus variant is discovered). DRIP is not a long term instrument and is not suitable for buy-and-hold investors. The fund lost more than 70% in the past year. Utilized with thoughtfulness and on a very short-term basis (1-2 days) this ETF can generate substantial returns due to its leverage. While we are in a multi-year energy bull market there will always be temporary pull-backs (such as the one just witnessed in the beginning of December) which can be speculated utilizing DRIP.

ETF Characteristics

AUM: $74mm

Expense Ratio: 1.06%

Inception Date: 2015

Type of Return: -2x

Holdings

DRIP seeks daily investment results of 200% of the inverse of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. The Index’s top holdings are:

index top 10 holdings

Top Holdings

Direxion

The index has subsector weightings which are as follows:

weight

Sector Weightings

Direxion

Since an investor cannot directly invest in an index, instruments such as DRIP provide for a capital markets way of accessing this index. The fund does swaps in order to gain the necessary daily exposure.

Performance

As discussed above, just like with any leveraged product DRIP is not a buy-and-hold vehicle. The fund is down more than -70% in 2021:

PX DRIp

2021 Price Return

Seeking Alpha

Indeed 2021 was a year when Energy rallied across the board, hence an investment vehicle that provides for an inverse result, and leveraged would have suffered. Suffice to say that if you had a negative view on Energy coming into 2021 you should have never used DRIP.

On a longer term basis, the total performance looks even more distressing:

grapha

3-Year Performance

Seeking Alpha

As we can see from the above graph DRIP is down more than -90% on a 3-year basis. This vehicle is NOT a buy and hold investment.

How should you use DRIP?

There are nonetheless times when the Energy market sells-off, sometimes very violently. For example in late November 2021, the new Omicron Variant was discovered. This led to a market panic, with many participants expecting severe lockdowns to follow. The impact to the E&P Producers was severe and immediate:

graph

DRIP Price Performance

Seeking Alpha

We can see that immediately after the new variant was discovered, the E&P Producers sold-off violently, with DRIP being up from -5% to +20% in a matter of a week. Similarly after the sentiment subsided, DRIP moved from +20% to 0% on a return basis. Then fund displayed another outsized gain of 20% when the issue flared up subsequently in mid December.

If you were a buy-and-hold investor you would have had a quasi 0% total return during this period, with massive volatility. However if you had utilized the tool as a day trading tool to speculate the flare-up in market concern about the new Covid variant you could have made 20% gains in both distinct instances for a 40% return in a span of a month. DRIP is to be used on more Covid variants emergences, and generally when the market is overbought with a potential event / news on the horizon that can tip it off its perch.

Conclusion

A good tool to be aware of, DRIP is not a buy and hold instrument but a leveraged fund best used by sophisticated investors for quasi day-trading activities. We saw in the above analysis how a savvy investor could have made a 40% during a calendar month if the Omicron flare-up was traded correctly using DRIP.


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