⛽DIGging Into Energy: Leveraged Bets on Oil & Gas

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Welcome back to ETF UNO! We simplify complex investment ideas into clear, practical, and engaging terms for your portfolio. Today, we’re exploring a dynamic fund designed for investors looking to increase their exposure to the energy sector: the ProShares Ultra Energy ETF $DIG ( ▼ 1.16% ) . If you've ever wondered how to significantly boost your exposure to oil, gas, and the broader energy complex without purchasing a single barrel or drilling a single well, DIG might be worth considering. However, as with any high-risk investment, it’s crucial to understand both its potential gains and the risks involved before making a decision. Let’s take a closer look.

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What is DIG?

Launched in 2007, ProShares Ultra Energy is a leveraged ETF designed to provide double (2x) the daily performance of the S&P Energy Select Sector Index. This index tracks the performance of U.S. energy companies that are part of the S&P 500, including major players such as ExxonMobil, Chevron, ConocoPhillips, and Schlumberger, as well as midstream operators and firms that provide energy equipment and services.

DIG, like all leveraged ETFs, utilises financial derivatives—primarily swaps and futures—to amplify its daily returns. When the energy sector rallies—often driven by geopolitical tensions, supply constraints, or surging global demand—DIG aims to double those daily gains. For investors with a high-conviction, short-term bullish outlook, this can significantly enhance returns compared to unleveraged alternatives.

There is one point often overlooked: the S&P Energy Select Sector Index provides a surprisingly resilient and diversified energy portfolio. It's not just about oil majors. The index includes:

• ➡️Integrated oil & gas companies (e.g., Exxon, Chevron): Benefit from both upstream (exploration/production) and downstream (refining/marketing) operations.

• 🛢️Oil & gas exploration & production (E&P) firms: Pure-play on commodity prices.

• 📦Midstream companies (pipelines, storage): Generate stable fee-based revenue, often less volatile than commodity prices.

• ⚙️Energy equipment & services providers: Gain from increased drilling and infrastructure investment.

Investment Strategy📊

As we discussed above, DIG is not designed for a traditional "buy and hold" strategy; instead, it serves as a tactical tool, not core holdings for investors who have strong convictions about the direction of the energy sector over the short to medium term. Here are some ways investors might think about DIG in a portfolio:

• 🚀Tactical Play on Energy Prices: If you believe oil prices will rise sharply in the short term (say, due to OPEC cuts, geopolitical risks, or surging demand), DIG could magnify those gains.

• 🛡️Hedge Against Inflation: Energy stocks often perform well when inflation is high. DIG offers a way to double up on that hedge.

• 🔄Sector Rotation Strategy: Some investors rotate exposure across sectors (technology, healthcare, energy, etc.). DIG can be a powerful short-term addition when energy is in favour.

• ⚖️Pairs Trading with Other Sectors: For advanced investors, DIG can be paired with inverse ETFs in other sectors to capture spread trades.

DIG at a glance

ETF Issuer: ProShares

Inception: 2007-01-30

Asset Class: Equity (with derivatives)

Underlying Index: S&P Energy Select Sector Index (2X)

Geographical Focus: U.S.

Expense Ratio: 1.04% (as of last data point)

Dividend Yield: 2.77% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

Since DIG magnifies the daily returns of the S&P Energy Select Sector Index, its long-term performance may differ from that of a non-leveraged ETF. The compounding effect means that over weeks and months, DIG’s results may diverge significantly from simply “2x” the index.

• Long-term behaviour: Over multi-year horizons, DIG often underperforms a simple “2x” multiple of the index because of volatility drag. If energy prices fluctuate wildly, that daily reset can erode performance.

• Bull runs: In strong energy upcycles, DIG shines. For example, during the 2021–2022 energy boom, when oil rebounded from pandemic lows and soared past $100 a barrel, leveraged energy ETFs like DIG delivered eye-popping short-term gains.

• Bear markets: On the other hand, when oil prices plummeted in 2020 during the COVID-19 pandemic, DIG investors felt amplified pain.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Amplified Upside in Bullish Energy Regimes: When the stars align—strong demand, constrained supply, geopolitical risk—DIG can deliver explosive returns that dwarf unleveraged alternatives. For tactical investors, this is the ultimate “conviction vehicle.”

2. Efficient Access to the Full Energy Value Chain: DIG doesn’t just track oil prices—it captures the entire S&P 500 energy sector, from drillers to pipelines to refiners. This built-in diversification within the industry can mitigate single-commodity risk.

3. Diversification Beyond Oil: DIG captures oil, natural gas, and equipment/service companies. That broad exposure means you’re not just betting on crude futures—you’re investing across the energy value chain.

Top 3 Reasons Not to Invest

1. Daily Reset Risk: DIG resets its leverage on a daily basis. Over time, this compounding effect can lead to returns that significantly deviate from 2x the index, particularly in volatile markets.

2. Not a Long-Term Holding: Due to the decay and leverage reset mechanics, holding DIG for months or years is generally not advisable. Historical data indicates that, over multi-year periods, DIG often underperforms compared to 2x the cumulative return of its index.

3. Expense Ratio and Costs: Leverage comes with costs. DIG has a higher expense ratio than non-leveraged ETFs, and the costs associated with derivatives used to achieve leverage are incorporated into its performance.

💥Supercharged Energy Investing with DIG

DIG is a specialised investment tool for those seeking to capitalise on energy sector movements. It offers leveraged exposure to major energy companies, allowing for capital allocation to other investments.

However, DIG comes with risks, including a daily leverage reset, high volatility, and the potential for significant losses, making it unsuitable as a long-term investment. It is best used as a tactical addition to a diversified ETF portfolio, suited for investors who understand its mechanics and are confident in short-term energy trends.

At ETF UNO, informed investors make better decisions. Whether you’re drawn to DIG’s potential or wisely steering clear, understanding how and why it works is half the battle.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.