Different approaches to crude oil
As we noted in the previous part of this series, WTI (West Texas Intermediate) crude oil futures fell ~5.6% in the week ended October 23, 2015, compared to the previous week ended October 16. Although retail investors don’t have easy access to the futures market, they can access other potentially 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). The ETF tracks prompt WTI crude oil futures. Its shares trade on the NYSE (New York Stock Exchange) like company stock. The fund fell 6.2% in the week ended October 23.
The second option would be the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). 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. It’s also a more diversified option for investors. It fell 6% in the week ended October 23.
Given the fund’s equal-weight holdings, many smaller, more volatile companies have an impact on its performance.
As you can see in the above graph, USO was outperforming WTI crude oil futures at the beginning of the week. But it started underperforming WTI by the middle of the week. It delivered lower returns compared to WTI crude oil as well as XOP by the end of the weekly cycle.
XOP was mostly underperforming WTI and USO throughout the week ended October 23. But as we already saw, it gave slightly better returns compared to USO at the end of the week but remained lower than WTI.
Investors can also gain indirect exposure to energy prices and potentially steady income by investing in MLP ETFs such as the Alerian MLP ETF (AMLP). AMLP holds midstream MLPs such as MarkWest Energy Partners (MWE).
In the next part of this series, we’ll look at trends in the WTI-Brent spread.