XOP more sensitive to crude oil compared to natural gas
The weighted production mixes of crude oil and natural gas in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are about 32% and 39%, respectively.
XOP has a weighted exposure of about 16% to downstream companies, which rebalances its portfolio. Above is a graph that illustrates the weighted production mixes of crude oil and natural gas in the ETF.
Why was XOP more volatile than the market in 3Q15?
XOP’s volatility, or total risk, rose by about 76% in 3Q15 over 2Q15 and was at 18%. The volatility of the S&P 500 (SPY) in 3Q15 was about 8%.
In 3Q15, crude oil fell by 19%, and natural gas was flat compared to the quarterly averages of 2Q15. This coincided with the increased volatility of XOP’s upstream stocks. In 3Q15, XOP’s market sensitivity (or beta) was 1.44x, up by 28% over 2Q15.
Volatility is the measure of systematic and non-systematic risk. Systematic risk arises because of financial market interdependencies, and non-systematic arises in relation to a company’s performance. Relatively higher volatility makes an investment riskier.