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Why Did XOP Perform Better than XLE Last Week?

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XOP

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) gained 5.21% in the week ending August 14. 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 increased more than the Energy Select Sector SPDR ETF (XLE) in the week ending August 14. In comparison, the United States Oil Fund (USO), lost 3.91% during the week, while the United States Natural Gas Fund (UNG) gained 0.3%.

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. The SPDR S&P 500 ETF (SPY) gained 0.71%.

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.

XOP’s two largest holdings are PBF Energy (PBF) at 2.29% and HollyFrontier Corporation (HFC) at 2.26%. These stocks have market capitalizations of ~$3.02 billion and ~$10.04 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, whose revenues are directly linked to energy prices.

Of the companies XOP holds, the biggest gainers in the week ending August 14 were Magnum Hunter Resources (MHR) and PDC Energy (PDCE), which gained 28.5% and 19.03%, respectively. Laredo Petroleum (LPI) gained 16.1%. These three companies account for 4% of XOP’s portfolio.

Comparing these gainers to the biggest gainers we saw in XLE in Part 1, we can see that XOP had outsized gainers compared to XLE. This explains why it ended up higher than XLE in the week.

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