Different approaches to crude oil
As we noted in the previous part of this series, WTI (West Texas Intermediate) crude oil futures fell ~5% in the week ended November 6, 2015, compared to the previous week ended October 30. 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 option would be an energy commodity ETF such as 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 ~4% in the week ended November 6, 2015.
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. However, given the fund’s equal-weight holdings, many smaller, more volatile companies have an impact on its performance.
XOP rose 5% in the week ended November 6, 2015.
As you can see in the above graph, USO was overperforming WTI crude oil futures throughout the week. It delivered better returns compared to WTI crude oil by the end of the weekly cycle.
XOP was overperforming both WTI and USO throughout the week ended November 6. It gave the highest returns among the three by the end of the weekly cycle.
XOP’s superior performance can partially be explained by higher natural gas prices, which increased ~2.2% in the period between October 30 and November 6. Many companies held by XOP also have exposure to natural gas prices.
Investors can also gain indirect exposure to energy prices and possible 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.