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OIH Was 1 of the Better-Performing Energy ETFs Last Week

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Jul. 28 2015, Published 8:49 a.m. ET

VanEck Vectors Oil Services ETF

The VanEck Vectors Oil Services ETF (OIH) fell 2.35% last week, which ended July 24. OIH tracks an index of the top 25 US-listed OFS (oilfield equipment and services) companies. OIH is a good proxy for playing energy prices because OFS companies’ fortunes tend to be closely linked to those of upstream or E&P (exploration and production) companies.

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Comparing performances

As a result, OIH tends to mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP tracks an index of predominantly upstream E&P companies. In the week ended July 24, XOP fell by 7.64%—see the above graph. But OIH fell less than XOP’s at the end of the week. This difference is likely because US crude oil rig counts decreased last week after rising for two weeks. Refer to the previous part in this series to learn more about XOP’s performance.

As we noted earlier, the United States Oil Fund (USO) fell 5.65%while the United States Natural Gas Fund (UNG) fell 3.68% last week. These commodity ETFs track changes in prompt futures prices.

OFS companies, as the name suggests, provide equipment and services that help E&P companies extract energy. These can range from resource analyses even before a well is drilled to the equipment used for drilling and energy transport.

As upstream companies expand their operations, OFS companies stand to gain. The opposite is also true. So, even though OFS companies tend to have longer-term contracts with upstream companies, any strength or weakness in upstream stocks quickly flows to OFS stocks. Another sector that benefits when upstream companies expand their operations is the MLP sector. This sector includes companies like ONEOK Partners (OKS).

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About OIH

OIH tracks a capitalization-weighted index. So, like we saw with XLE in Part 1 of this series, OIH can also be prone to dominance by a handful of large companies. Industry leaders Schlumberger (SLB) and Halliburton (HAL) together account for almost one-third of OIH’s holdings. SLB lost ~1% last week while HAL gained 4.3% in the same period. HAL had a positive earnings release, which explains why it gained. You can read more about it at Halliburton’s 2Q15 Earnings: Must-Know Takeaways.

Indeed, just the top five holdings—including Baker Hughes (BHI), National Oilwell Varco (NOV), and Cameron International (CAM)—together with Schlumberger and Halliburton, account for about half of OIH. This makes OIH not only a very industry-specific security, but also one that’s very reliant on the fortunes of a handful of big companies.

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