2x Leveraged or double ETFs were designed primarily for traders who wanted to gain additional exposure without the use of margin. Since they are leveraged they have to employ financial derivatives to achieve leverage, these can include futures, options or swaps. As you will see, these ETFs can be great trading vehicles but should not be considered long term "buy and hold" instruments.

DIG - ProShares Ultra Oil and Gas ETF seeks to track the results, before fees and expenses, that correspond to twice (200%) of the daily performance of the DJ U.S. Oil & Gas Index. This ETF was established 1/30/2007 and is comprised of roughly 77% oil and gas producing companies and 22% oil services and uses other financial instruments or derivatives to gain the 200% leverage.

The annual expense ratio is .95% (95 Basis Points) and recently it had net assets of $322 Million and Average Daily Trading Volume of just over 1.2 million shares per day so it too is a very liquid ETF.

When you look at the following chart comparing DIG to XLE you will see why most professionals consider Leveraged ETFs to be trading vehicles and not long term investments. You can see there are periods of time where DIG strongly out performed XLE but if you held them both since 1/30/2007 you would be up about 22% in XLE but would've lost nearly 22% in DIG.

DIG Performance Since Inception VS XLE

Chart begins on DIG first trading day 1/30/2007

In the short term however you can see why traders love DIG. This second chart shows the performance of DIG vs XLE during the rally in energy stocks that began in September 2010. In this case, DIG is up over 90% while XLE is up less than 40%.

This is a daily chart from 9/1/2010 to 2/08/2011 to illustrate a shorter time horizon.

DUG - ProShares UltraShort Oil And Gas ETF seeks to track the results, before fees and expenses, that correspond to twice (200%) the inverse of the daily performance of the DJ U.S. Oil & Gas Index. This ETF was established the same day as DIG (1/30/2007) and is basically the inverse of that ETF.

The annual expense ratio is .95% (95 Basis Points) and it recently had net assets of $100 Million and Average Daily Trading Volume of just over 500,000 shares so it too is a very liquid ETF.

When you look at the following chart it should reinforce the notion that these Leveraged Oil ETF products may be great for trading but should not be held as long term investments. Since 1/30/2007 (first trading day for both DIG and DUG) you can see that the Amex Oil and Gas Index (XOI) is up roughly 10%. During this same time DIG has declined about 25% despite the huge rally the past 6 months. The one that really blows the mind of novice investors is that DUG is down more than 90%!  A novice investor would think that since the XOI is only up about 10% over the time frame that a double short fund should be down about 20% but this is not the case. This is where you have to understand the concept of achieving 200% of the "Daily Performance" of the underlying not 200% of the long term performance. There is a big difference as you can clearly see!

DIG & DUG Performance Since Inception VS XOI (Amex Oil & Gas Index)

Chart begins on first trading day of DIG & DUG (1/30/2007)

If this is the case, why would anyone trade DUG?  Again, it's a good short term trading vehicle and can provide an easy way to quickly hedge an oil and gas portfolio. Look at what happened in the July - November 2008 time frame when the stock market came under severe pressure. For a short period of time DUG became a superstar returning as much as a 500% inverse correlation (when xoi was down 40-50% DUG was briefly up as much as 240%).

This chart is from 7/1/2008 to 11/1/2008