Different approaches to crude oil
As we noted in the last part of this series, WTI (West Texas Intermediate) crude oil futures fell by 3.08 % in the week ending September 11. Although retail investors don’t have easy access to the futures market, they can access other safer and low-cost avenues to bet on WTI crude oil prices.
The first avenue would be an energy commodity ETF like the United States Oil Fund LP (USO). USO tracks prompt WTI crude oil futures. USO shares trade on the NYSE like company stock. The fund fell 2.85 % in the week ending September 11.
The second option would be the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP holds many US energy companies that have exposure to oil prices due to their upstream operations.
Because of their indirect exposure to volatile oil prices, ETFs like XOP are typically a safer and more diversified option for conservative investors. XOP fell 1.96% in the week ending September 11.
As you can see in the above graph, USO almost mirrored WTI crude oil futures throughout the week, but delivered slightly better returns compared to WTI crude oil by the end of our weekly cycle.
XOP overperformed both WTI and USO throughout the week and delivered the best returns among the three in the week ending September 11. XOP’s indirect exposure to crude oil prices, through energy stocks, should give it better downside protection from a fall 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. They rose 1.43% in the week ending September 11. This explains its superior performance compared to USO and WTI crude oil futures.
Investors can also gain indirect exposure to energy prices and the potential for steady income by investing in MLP ETFs like the Alerian MLP ETF (AMLP). AMLP holds midstream MLPs like MarkWest Energy Partners (MWE).
In the next part of this series, we’ll discuss trends in the WTI-Brent spread.