Different approaches to crude oil
As we saw in the previous part, WTI crude oil futures fell 4.5% in the July 2 week. While retail investors don’t have easy access to the futures market, they can benefit from access to other safer, low cost avenues to bet on WTI crude oil prices.
The first is energy commodity ETFs such as the United States Oil Fund ETF (USO), an ETF that tracks prompt WTI crude oil futures. Shares of USO trade on the NYSE like company stock. The fund lost ~5.3% in the week ended July 2.
The second is an ETF like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). It holds many American energy companies that have exposure to oil prices due to their upstream (oil production) operations. Because of their indirect exposure to volatile oil prices, ETFs like XOP are typically a safer, more diversified option for more conservative investors. XOP lost 6.2% in the July 2 week.
As we can see in the graph above, USO underperformed WTI crude oil futures for almost the entire week, as did XOP for the entire week. WTI gave better returns than both USO and XOP at the end of the week.
XOP gave the lowest returns for the week ended July 2. Magnum Hunter Resources Corporation (MHR), one of its major holdings, fell ~23% during the week, pulling the ETF lower. XOP’s indirect (via energy stocks) exposure to crude oil prices gives it better downside protection to a drop in crude oil prices compared to USO. But, given the fund’s equal-weight holdings, many smaller and more volatile companies, such as MHR, have an impact on its performance.
Other companies that XOP holds include Chevron (CVX), Occidental Petroleum (OXY), and Apache (APA). All these companies make up ~4% of the ETF. CVX fell by ~2.77% in the July 2 week, while APA fell by almost 3%. OXY fell the most, by ~4.4% in the week ended July 2.
Investors can also gain indirect exposure to energy prices along with steady income by investing in MLP (master limited partnership) ETFs such as the Alerian MLP ETF (AMLP), which holds midstream MLP companies like Magellan Midstream Partners (MMP).
Continue to the next part to read about trends in the WTI-Brent spread.