Different approaches to crude oil
As we noted in the previous part of this series, WTI (West Texas Intermediate) crude oil futures fell by ~4% between July 13 and July 20. Though retail investors don’t have easy access to the futures market, they can access other safer, low-cost avenues to bet on WTI crude oil prices.
The first avenue would be an energy-commodity ETF such as the United States Oil Fund LP (USO). This ETF tracks prompt WTI crude oil futures. USO shares trade on the NYSE like a company stock. The fund fell by ~5% in the week ended July 20.
The second avenue would be the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). It holds many US 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 such as XOP are typically a safer, more diversified option for conservative investors. XOP fell by 8% in the week ended July 20.
As you can see in the graph above, USO underperformed WTI crude oil futures throughout the week. XOP, on the other hand, started out by overperforming both USO and WTI prices initially in the week. However, the fund started falling at the end of the week, underperforming both USO and WTI prices. XOP delivered the lowest returns by the end of our weekly cycle.
Usually, XOP’s indirect exposure—via energy stocks—to crude oil prices gives it better downside protection from a drop in crude oil prices relative to USO. But given the fund’s equal-weight holdings, many smaller and more volatile companies affect its performance.
Companies held by XOP include ConocoPhillips (COP), Anadarko Petroleum (APC), and Hess (HES). These three stocks make up ~5% of the ETF. COP lost 4% between July 13 and July 20. APC also lost 4%. HES lost 6.8% in the same period.
You can also gain indirect exposure to energy prices, along with steady income, by investing in MLP ETFs such as the Alerian MLP ETF (AMLP). This ETF holds midstream MLP companies like Magellan Midstream Partners (MMP).
In the next part of this series, you can read about trends in the WTI–Brent spread.