Different approaches to crude oil
As we noted in the previous part of this series, WTI (West Texas Intermediate) crude oil futures increased by 5.8% in the week ended August 28. 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), an ETF that tracks prompt WTI crude oil futures. USO shares trade on the New York Stock Exchange like company stock. The fund spiked by 12.47% in the week ended August 28.
The second option would be 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 such as XOP are typically a safer, more diversified option for conservative investors. XOP gained 5.06% in the week ended August 28.
As you can see in the graph above, USO mirrored WTI crude oil futures as did XOP earlier in the week. But USO delivered the highest returns by the end of our weekly cycle.
XOP, on the other hand, underperformed both WTI and USO, and delivered the lowest returns in the week ended August 28. The ETF’s indirect exposure (via energy stocks) to crude oil prices should give 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 have an impact on its performance. Key companies held by XOP include Chevron (CVX), ConocoPhillips (COP), and Apache (APA). They make up ~4% of the ETF.
Investors 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 MarkWest Energy Partners (MWE).
In the next part of this series, we’ll discuss trends in the WTI-Brent spread.