A potent combination of soaring inflation and hawkish Fed interest rate hikes have sent markets into a freefall and arguably bear territory.

Year-to-date (YTD), the S&P 500 (SPX) and Nasdaq 100 (NDX) indexes are down over -18% and –27% respectively as high-valuation tech growth stocks faltered. Even traditionally resilient sectors like consumer staples have suffered severe losses, dragged down by disappointing earnings reports from Target (TGT) and Walmart (WMT).

However, there is an exception the energy sector. Having benefited from soaring commodity prices, supply chain constraints, and geopolitical crisis in Ukraine, the sector has soared, marking a significant reversal from its pandemic-era lows.

Trading the energy sector

YTD, the Energy Select Sector SPDR Fund (XLE) is up over 42%, significantly outperforming the other 11 sectors and the market as a whole. Energy sector companies have enjoyed stronger balance sheets, cashflow, revenues, and earnings.

Investors looking to trade the energy sector can go long and short via a variety of instruments. Some investors may elect to buy or short the stocks of large-cap energy sector companies such as Exxon Mobil (XOM) and Chevron Corp (CVX).

For additional exposure, investors may elect to leverage up via portfolio margin. This is risky as margin is subject to borrow rates (which are expected to go up as various central banks initiate interest rate hikes) and the ever-present danger of a margin call should the value of your holdings fall.

Investors could also trade options. Buying out-of-the-money (OTM) calls or puts with a few days to a week until expiry could magnify losses and gains significantly. However, this exposes an investor’s capital to theta decay (the rate at which an options premium loses value over time), and implied volatility (IV) crush (the loss in an options premium due to suddenly decreased volatility, typically after earning are released). Options also expire, so a degree of market timing is required which causes additional risk.

A better way to manage risk

Investors may want to look instead at an instrument allowing them to participate fully in the upside, but capping their downside, with no risk of margin calls, theta decay, volatility crush, or expiration.

Leverage Share’s suite of exchange-traded products (ETPs) offer daily three times (3x) leveraged exposure to the performance of the energy sector (XLE). Investors can use these ETPs to ride the momentum both ways, by either going long with XL3, or going short with XLGS.

If you’re bullish or bearish on a particular single ticket, Leverage Shares also offers 3x daily leveraged long exposure and 1x daily inverse exposure to Royal Dutch Shell (SHEL) via RSH3 and RDSS. The same goes for BP plc (BP) via BP3L and BPS.

The physically backed nature of both ETPs ensures good liquidity and a narrow bid-ask spread, allowing you to enter and exit positions easily. Your risk is also capped based on how many shares you hold, making position sizing easy (just buy and sell shares) compared to maintaining margin requirements or calculating options delta exposure.

What’s next?

Regardless of your thesis for the energy sector, one thing remains certain: the market volatility will continue for the foreseeable future. While past performance is not indicative of future performance, trading around the recent momentum in the energy sector could be a profitable and rewarding endeavour. Using leveraged ETPs can help you achieve your desired risk/return profile more easily and efficiently.