Different approaches to crude oil
As we noted in the previous part of this series, WTI (West Texas Intermediate) crude oil futures increased by 1.83% in the week ended September 4. Although 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 gained 1.3% in the week ended September 4.
The second option would be the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP 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. However, XOP fell ~2.6% in the week ended September 4.
As you can see in the graph above, USO mirrored WTI crude oil futures, but it delivered lower returns compared to WTI crude oil by the end of our weekly cycle.
XOP, on the other hand, underperformed both WTI and USO throughout the week and delivered the lowest returns in the week ended September 4. 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. However, given the fund’s equal-weight holdings, many smaller and more volatile companies have an impact on its performance. XOP is also affected by natural gas prices, which fell 2.2% in the week ended September 4.
Investors can also gain indirect exposure to energy prices and the potential for steady income by investing in MLP ETFs such as the Alerian MLP ETF (AMLP). This ETF holds midstream MLPs like MarkWest Energy Partners (MWE).
In the next part of this series, we’ll discuss trends in the WTI-Brent spread.