Why XOP Fell More Than XLE Last Week


Sep. 17 2015, Published 12:20 p.m. ET

XOP performance

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 1.96% in the week ended September 11. 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 fell more than the Energy Select Sector SPDR ETF (XLE) in the week ended September 11. We looked at XLE’s performance in the previous part of this series.

The United States Oil ETF (USO) fell 2.85% during the week, while the United States Natural Gas ETF (UNG) gained 1.67%. USO and UNG track prompt crude oil and natural gas futures prices, respectively. The broad market SPDR S&P 500 ETF (SPY) rose 2.15%.

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 HollyFrontier (HFC) at 2.27% and Tesoro (TSO) at 2.21%. These stocks have market capitalizations of ~$9.07 billion and ~$11.76 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 should give 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 driven by performances of USO and UNG, as it’s more weighted toward E&P companies whose revenues are directly linked to crude oil and natural gas prices.

Of the companies XOP holds, the biggest losers in the week ended September 11 include Magnum Hunter Resources (MHR) and Penn Virginia (PVA), which fell ~27.14% and ~25%, respectively. Bonanza Creek Energy (BCEI) fell 23.8%. These three companies account for ~2% of XOP’s portfolio.


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