XOP Is a Better Trade than Commodity ETFs in June 26 Week



SPDR S&P Oil & Gas Exploration & Production ETF

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 0.1% in the week to June 26. XOP tracks an index of 74 US energy companies, mainly operating in the E&P (exploration and production) space.

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Comparing performances

Unlike the Energy Select Sector SPDR ETF (XLE), XOP fell marginally last week. Refer to the last part of this series for commentary about XLE’s performance last week. However, XOP was a better trade against commodity ETFs like the United States Oil Fund (USO). It fell 0.2% last week. The United States Natural Gas Fund (UNG) emerged as the biggest loser in the week ending June 26. It fell ~2.1%. USO and UNG track prompt crude oil and natural gas futures prices, respectively.

The SPDR S&P 500 ETF (SPY) lost ~0.5% last week. It was weighed down by speculation surrounding Greece’s exit from the Eurozone.

About XOP

Unlike XLE, XOP tracks an equal-weighted index. This means that constituent weights are capped in a narrow range. No stock exceeds 2% of the index. So, the funds’ performance won’t be skewed by a handful of holdings—as in XLE’s case. But, this also means that many smaller, more volatile companies have an impact on its performance.

XOP’s two largest holdings are Magnum Hunter Resources (MHR) at 1.94% and Penn Virginia (PVA) at 1.64%. They have market capitalizations of just ~$387 million and ~$357 million, respectively.

This trade-off makes XOP more risky than XLE in some ways. But, it also positions XOP as a “sharper” tool to play an upswing in energy prices. Of course, USO and UNG would be better for this purpose, but XOP’s indirect exposure—through energy stocks—gives it better downside protection. MLPs (master limited partnerships), like Plains All American Pipelines (PAA), also provide indirect exposure to energy prices.

Typically, XOP’s performance should be closer to USO and UNG because it’s more weighted towards E&P companies. The revenue is linked directly to energy prices.


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