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Why Oil Services ETF OIH Mirrored XOP Last Week

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The VanEck Vectors Oil Services ETF

The VanEck Vectors Oil Services ETF (OIH) fell 1.75% in the week ended September 11. This ETF tracks an index of the top 25 US-listed oilfield equipment and services (or OFS) companies.

OIH is a good proxy for playing energy prices because OFS companies’ fortunes tend to be closely linked to those of upstream, or exploration and production, companies.

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Comparing performances

OIH should mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks an index of predominantly upstream E&P (exploration and production) companies.

As upstream companies expand their operations, OFS companies stand to gain. The opposite is also true. So even though OFS companies tend to have longer-term contracts with upstream companies, any strength or weakness in upstream stocks quickly flows to OFS stocks.

In the week ended September 11, OIH gave slightly better returns than XOP toward the end of the week. Another sector that benefits when upstream companies expand their operations is the MLP sector, which includes companies like Magellan Midstream Partners (MMP).

As we noted earlier, the United States Oil ETF (USO) fell 2.85%, while the United States Natural Gas ETF (UNG) rose 1.67% in the week ended September 11. These commodity ETFs track changes in prompt futures prices. As we saw in the previous part, XOP’s performance is driven by movements in crude oil and natural gas prices.

OFS companies, as their name suggests, provide equipment and services that help E&P companies extract energy, which can range from resource analyses to drilling and energy transportation equipment.

About OIH

OIH tracks a capitalization-weighted index. As we saw with XLE in Part 1 of this series, OIH can also be prone to dominance by a handful of large companies. Industry leaders Schlumberger (SLB) and Halliburton (HAL) together account for almost a third of OIH’s holdings.

Indeed, just the top five holdings, including Baker Hughes (BHI), National Oilwell Varco (NOV), and Cameron International (CAM), together with SLB and HAL, account for about half of OIH’s portfolio. This makes OIH not only a very industry-specific security but also highly reliant on a handful of big companies’ fortunes.

In the week ending September 11, OIH’s biggest losers included Seadrill (SDRL), which fell 9%, and Tidewater (TDW), which fell 7.54%. Silica Holdings (SLCA) fell 7.48% in the same period. These three companies together constitute ~3% of OIH.

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