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XOP Fares Better than XLE in the Week Ending August 7

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XOP

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) lost 2.97% in the week ending August 7. XOP tracks an index of 74 American energy companies that mainly operate in the exploration and production (E&P) space.

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Comparing performances

XOP declined less than the Energy Select Sector SPDR ETF (XLE) in the week ending August 7. It also fell less than the United States Oil Fund (USO), which lost a significant 6.61% during the week. The United States Natural Gas Fund (UNG) was the only gainer in the week ended August 7, rising 2.84%.

USO and UNG track prompt crude oil and natural gas futures prices, respectively. Refer to Part 1 of this series to read more about XLE’s performance in the week ended August 7. The SPDR S&P 500 ETF (SPY) lost 1.21% in the week ending August 7.

About XOP

Unlike XLE, XOP tracks an equal-weighted index. This means that constituent weights are capped in a narrow range. Not many stocks exceed 2% of the index. So, the fund’s 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. However, in the week ending August 7, XOP performed better than XLE.

XOP’s two largest holdings are HollyFrontier Corporation (HFC) at 2.22% and Tesoro Corporation (TSO) at 2.16%. These stocks have market capitalizations of ~$9.56 billion and ~$12.74 billion, respectively.

This trade-off makes XOP riskier than XLE in some ways. But, this also positions XOP as a sharper tool to play energy prices. Of course, USO and UNG would be better for this purpose, but XOP’s indirect (via energy stocks) exposure gives it better downside protection. MLPs such as Plains All American Pipelines (PAA) also provide indirect exposure to energy prices.

Typically, XOP’s performance should be closer to USO and UNG, as it’s more weighted toward E&P companies, which have revenues that are directly linked to energy prices.

Of the companies held by XOP, the biggest losers in the week ending August 7 were Penn Virginia Corporation (PVA) and Magnum Hunter Resources (MHR), which lost 30.67% and 18.93%, respectively, during that week. Sanchez Energy Corporation (SN) lost 16.64% during the same period.

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