The ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL) combines the worst features of a rolling futures fund and a levered ETF. It suffers from futures roll decay, as well as volatility decay. The combination of these two features has caused the fund to lose an average of 41% p.a. despite natural gas prices doubling over the past decade.
Investors should stay away from BOIL unless they want to express a short-term bullish view on natural gas prices.
The ProShares Ultra Bloomberg Natural Gas ETF seeks daily returns that are 2x the return of the Bloomberg Natural Gas Subindex (“Index”). The index reflects the daily performance of a rolling position in front-month natural gas futures. As the expiry date for the futures contract approaches, the index replaces expiring contracts with later expirations.
The BOIL ETF is a favourite among day traders, with over $500 million in net assets. It charges an expense ratio of 0.95%.
BOIL provides 2x the daily return of an index that measures the price performance of natural gas as reflected through publicly traded natural gas futures contracts. BOIL is a leveraged ETF, and like all geared products, is intended to be held only short periods, its not appropriate for buy-and-hold investors.
Whatever You Do, Don’t Buy And Hold
The first thing investors should realize about the BOIL ETF is that due to its rolling position in natural gas futures, the BOIL ETF should only be used to speculate on short-term moves in natural gas futures prices.
For example, Figure 1 shows the long-term historical returns of the BOIL ETF, to November 30, 2022. Notice that aside from the short-term period of 1 Year, the ETF has annualized losses ranging -22.4% on 3Yr to -41.3% on 10Yr. If an investor invested $100 into BOIL 10 years ago, that investment would be worth $0.49!
Figure 1 – BOIL historical returns (proshares.com)
In contrast, spot natural gas prices at the end of November 2022 were $6.93, almost a double from $3.58 at the end of November 2012 (Figure 2).
Figure 2 – Long term natural gas spot prices (stockcharts.com)
Daily Leverage Introduces Volatility Decay
Another feature of the BOIL ETF is its 2x daily leverage. Levered ETFs have two key features that investors should be aware of. First, they have positive convexity in the direction of the bet. What this means is that ones exposure to a given underlying asset grows if the price action is in ones favour. For example, assume you invested $100 in BOIL. If the underlying index returns 5% on day 1, the position will grow to $110 (2 times 5% return). If the index returns 5% again on day 2, the position will grow to $121. This is more than twice the theoretical 2-day compounded return of 10.25% or $120.50.
If the return experience is +5% followed by -5%, investors end up with $99.00, significantly less than twice the 2-day compounded loss of 0.25% or $99.50. This slippage is due to volatility decay, a second feature of levered ETFs. While the volatility decay may seem small on a 1-day basis, over the long-run, this can turn into very significant underperformance, especially for a volatile asset class like natural gas futures.
The BOIL ETF combines the roll decay of a rolling-futures fund with the volatility decay of a levered ETF. No wonder it has a 10Yr average annual return of -41.3%!
DECAY – The Dangers & Myths Of Investing In BOIL & UNG !! (Natural Gas ETFs) *EXPLAINED*
FAQ
How long can I hold BOIL stock?
Is BOIL a good stock to buy?
Why did BOIL stock drop so much?
What makes BOIL stock go up?
Where can I buy boil stock online?
Shares of BOIL stock can be purchased through any online brokerage account. Popular online brokerages with access to the U.S. stock market include Charles Schwab, E*TRADE, Fidelity, and Vanguard Brokerage Services. Compare Top Brokerages Here. View the latest news, buy/sell ratings, SEC filings and insider transactions for your stocks.
What is the best way to heal a boil?
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What’s the difference between Boil & Kol?
BOIL is a short-term instrument that will magnify the price action on the upside but suffer from substantial underperformance during price corrections. KOLD is BOIL’s bearish counterpart with $96.381 million in assets under management. KOL trades an average of over 1.521 million shares each day and charges the same 0.95% expense ratio.
What are Boiler & Gold?
BOIL and KOLD are short-term products that are alternatives to natural gas futures. Volatility creates a paradise for active traders with their fingers on the pulse of markets. Natural gas is likely to offer lots of opportunities as the market’s dynamics have changed.