After a strong start to the second quarter, the energy sector again lost momentum last month. This is especially true, as the ultra-popular Energy Select Sector SPDR (XLE - ETF report) shed $648 million in its asset base, as per ETF.com and lost 5.5% in May compared to a gain of 0.3% for the broad market fund (SPY - ETF report).  

The steep decline came in the wake of deteriorating fundamentals and a 3.2% decline in Brent oil price, though crude is up 0.5% in the same period. Investors should note that oil prices jumped nearly 5% on Friday on a higher-than expected fall in rig count (read: 3 Energy ETFs Leading The Oil Rally).

Weak Trends

Despite the 25th straight weekly drop in U.S. oil rig counts and billions of dollars in spending cuts, oil production has been rising in the U.S. at a 43-year high and crude stockpiles have reached highs not seen in at least 80 years. The Organization of Petroleum Exporting Countries (OPEC) is pumping up maximum oil in more than two-and-a-half years buoyed by higher output from Iraq and Iran. The output from OPEC is expected to remain lofty for some more months.

Additionally, the top oil exporter – Saudi Arabia – is boosting production to at least a three-decade high and other non-OPEC producers like Russia, Brazil, China, Vietnam and Malaysia are ramping up production, adding to the global supply glut (read: Oil Yet to Find Bottom: Go Short With These ETFs).

As oil output is not showing any sign of slowdown, the International Energy Agency (IEA) raised its non-OPEC production forecast by 200,000 barrels a day to 830,000 barrels for this year and reaffirmed its OPEC oil production outlook at 30 million barrels a day for the second half. Coming to the demand side, the agency continues to expect global oil demand to grow by 1.1 million barrels a day to 93.6 million in 2015.

Further, the draft report of OPEC ahead of its policy meeting in Vienna on June 5 indicates that the global oil glut will continue for two more years on growing crude supplies from non-OPEC producers. The negative demand/supply imbalance would push oil prices and the stocks further down at least in the short term.

Moreover, the ultra-popular United States Oil Fund (USO - ETF report), tracking the price of light crude with an asset base of around $3 billion and average daily volume of around 28.7 million shares, pulled out a billion dollars from its asset base in April and May, according to data compiled by Bloomberg.

Given the massive outflow and the bearish outlook, the appeal for energy ETFs is dulling, especially if oil price falls or remains below $50 per barrel. As a result, investors who are bearish on oil right now may want to consider a near-term short on the energy sector. Fortunately, with the advent of ETFs, this is quite easy as there are many options to accomplish this task. Below we highlight them and state how each stands out among the rest (read: Short Oil ETFs in Focus as Crude Prices Keep Falling):

ProShares Short Oil & Gas ETF (DDG - ETF report)

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when the energy stocks decline and is suitable for hedging purposes against the fall of these stocks. The product has amassed $4.5 million in AUM while volume is light under 10,000 shares. Expense ratio came in at 0.95%. It added over 4% over the past one month.

ProShares UltraShort Oil & Gas ETF (DUG - ETF report)

This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging 95 bps in fees. It has amassed $46.7 million in its asset base and trades in good volume of more than 244,000 shares per day on average. DUG returned 10.7% in the last one month.

Direxion Daily Energy Bear 3x Shares ETF (ERY - ETF report)

This product provides three times (3x) inverse exposure to the Energy Select Sector Index. Though it charges the same annual fee of 95 bps, it is extremely popular and trades in heavy volume nearly 3 million shares. The fund has a decent AUM of $66.9 million and gained 17.1% in May.

ETRACS 1xMonthly Short Alerian MLP Infrastructure Index ETN (MLPS - ETF report)

This is an ETN option and provides short exposure to the master limited partnerships (MLP) corner of the U.S. energy segment. It tracks the inverse performance of Alerian MLP Infrastructure Total Return Index plus return on a T-bill. The note failed to garner enough investor interest with AUM of just $4.4 million and sees a paltry volume of less than 9,000 shares a day. MLPS charges 85 bps in annual fees and expenses, and gained 2.3% in May.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Inverse Equity ETFs here).

Still, for ETF investors who are bearish on the energy sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is your friend” in this corner of the investing world.