Different approaches to crude oil
As we noted in the last part of this series, WTI (West Texas Intermediate) crude oil futures were flat in the week ended September 18 compared to the previous week ended September 11. 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 like the United States Oil ETF (USO). USO tracks prompt WTI crude oil futures. USO shares trade on the NYSE (New York Stock Exchange) like company stock. The fund fell 0.2 % in the week ended September 18.
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, more diversified option for conservative investors. XOP fell 1.04% in the week ended September 18.
As you can see in the above graph, USO mirrored WTI crude oil futures throughout the week. But it delivered slightly lower returns compared to WTI crude oil by the end of the weekly cycle.
XOP underperformed both WTI and USO throughout the week ended September 18 and delivered the lowest returns among the three. 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, more volatile companies have an impact on its performance. XOP is also affected by natural gas prices. Natural gas fell ~3.3% in the week ended September 18. This explains XOP’s weaker performance compared to USO and WTI crude oil futures.
Investors can also gain indirect exposure to energy prices, and also potentially 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 look at trends in the WTI-Brent spread.