Energy ETFs Rally, Highlighting Leverage

Energy funds were the best performers this week, helped by leverage.
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TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Crude oil spiked to an eight-month high this week, benefiting exchange traded funds more than open- and closed-end funds.

The average energy fund gained 2.8%, excluding inverse funds that sell short energy investments, in the week ending June 11. The best performer, which jumped 10%, was

ProShares Ultra DJ-UBS Crude Oil

(UCO) - Get Report

. The ETF is leveraged 200% to the daily return of the Dow Jones-UBS Crude Oil Sub-Index using futures and swap contracts on crude oil.

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While energy demand is only starting to return to the U.S., the rest of the world, especially China, is soaking up the slack. The International Energy Agency on Thursday raised its estimate for global oil demand by 120,000 barrels to a total of 83.3 million barrels a day. Meanwhile, U.S. stockpiles of oil dropped 4.38 million barrels in May. West Texas Intermediate Crude Oil closed at a spot price of $72.68 a barrel, up $3.87 in one week.

Targeting 300% of the daily performance of the

Russell 100 Energy Index


Direxion Daily Energy Bull 3X Shares

(ERX) - Get Report

took second place, with a pop of 8.8%. Among the companies contributing the most to the rise in the ETF were returns of 18% in

Hercules OffShore


, 16% in

Quicksilver Resources


and 14% in

Walter Energy



The third-best performer,

Rydex 2X S&P Select Sector Energy ETF


, climbed 8.7%. The fund's largest gainer,

El Paso


, added 11% on a news of a Brazilian oil and natural gas well discovered in conjunction with


(PBR) - Get Report

. Another holding,

Massey Energy


, was up 7.9%, extending the previous week's increase of 11%.

Setting aside the ETFs negatively leveraged to the energy market, two of the worst performers this week track carbon trading. The

iPath Global Carbon ETN

(GRN) - Get Report

and the

AirShares EU Carbon Allowances


, lost 7.1% and 5.2%, respectively.

Going the opposite direction of crude oil, natural gas prices have been compressed to the lowest level since October 2002. What do natural gas prices have to do with carbon allowances?

When the price of natural gas drops, utilities may switch from dirtier forms of energy, such as coal. About twice as many carbon emission permits are required to burn coal per unit of energy compared with natural gas.

Exxon Mobil

(XOM) - Get Report

, joining the $26 billion project to bring North Slope Alaskan natural gas to the lower 48 states, implies the long-term price outlook isn't much better than the near term.

For more information, check out an

explanation of our ratings


Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.