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XOP’s Losses Exceed XLE’s in the Week Ended August 21

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XOP

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) lost 9.63% in the week ending August 21. XOP tracks an index of 74 American energy companies that mainly operate in the exploration and production (or E&P) space.

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Comparing performances

XOP decreased more than the Energy Select Sector SPDR ETF (XLE) in the week ending August 21. We discussed XLE’s performance in the previous part of this series. In comparison, the United States Oil Fund (USO) lost 5.43% during the week, while the United States Natural Gas Fund (UNG) lost 4.98%.

USO and UNG track prompt crude oil and natural gas futures prices, respectively. The broad market SPDR S&P 500 ETF (SPY) lost 5.63%.

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. Thus, 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 2.44% and HollyFrontier Corporation (HFC) at 2.35%. These stocks have market capitalizations of ~$3 billion and ~$9.72 billion, respectively.

This trade-off makes XOP riskier than XLE in some ways. However, 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 losers in the week ending August 21 were Magnum Hunter Resources (MHR) and Green Plains (GPRE), which lost 22.29% and 19.59%, respectively. WPX Energy (WPX) lost 18.73%. These three companies account for 3.77% of XOP’s portfolio.

Comparing these companies to XLE’s biggest losers we looked at in part one of this series, we can see that the companies that XOP holds had bigger losses compared to XLE. This explains why XOP ended up lower than XLE in the week.

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