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Energy ETFs: Quantitative Insights Investors Should Know

PART:
1 2 3 4
Energy ETFs: Quantitative Insights Investors Should Know PART 1 OF 4

US Crude Oil Is above $50: How Are Energy ETFs Faring?

US crude oil prices

On October 6, 2016, the active futures contracts for US crude oil (UWTI) (USO) (DWTI) (USL) (OIIL) closed at $50.44—a rise of ~1.2% compared to the previous trading session. It’s only 1.6% lower than the 2016 high of $51.23 on June 8, 2016.

US Crude Oil Is above $50: How Are Energy ETFs Faring?

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From September 29 to October 6, 2016, US crude oil futures contracts for November delivery rose ~5.5%. The rise in oil prices was due to a bullish U.S. Energy Information Administration inventory report and potential OPEC action to cap the oil output.

Natural gas prices

Natural gas active futures (UNG) rose ~3.0% from September 29 to October 6, 2016, in anticipation of stockpiles coming back into balance.

Performance of energy ETFs

Below are the performances of some energy ETFs from September 29 to October 6, 2016:

  • The Energy Select Sector SPDR ETF (XLE) rose ~2%.
  • The Alerian MLP ETF (AMLP) fell -1.2%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose ~3.1%.
  • The VanEck Vectors Oil Services ETF (OIH) rose ~4.0%.

The rise in the above ETFs corresponded with the rise in oil prices during this period. So, the rise in energy ETFs could be attributed to the rise in oil prices. Later in this series, we’ll analyze the correlations among these ETFs and crude oil and natural gas.

Understanding ETF performances

AMLP underperformed other energy ETFs. It fell 1.2% between September 29 and October 6, 2016. Movements in crude oil have less of an impact on midstream companies than other energy subindustries. AMLP holds midstream companies.

XOP outperformed XLE from September 29 to October 6, 2016. Historically, XOP had a higher correlation to crude oil (UWTI) (USO) (DWTI) (USL) (OIIL) than other energy ETFs. XOP has more upstream companies in its portfolio. XOP is impacted more by crude oil prices than XLE, AMLP, and OIH.

OIH also has a high correlation with crude oil because its businesses are directly linked to upstream companies’ drilling activities. OIH outperformed the other three energy ETFs in the trailing week.

We’ll look at the correlation of energy ETFs and crude oil in Part 4 of this series.

Sentiments related to natural gas (UNG) and crude oil (SCO) (DWTI) also impact other ETFs including the ProShares Ultra Oil & Gas ETF (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).

In the next part of this series, we’ll compare the price performances of the United States Natural Gas ETF (UNG) and the United States Oil ETF (USO).

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