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What’s the Correlation of Energy ETFs to Crude Oil, Natural Gas?

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Correlation of top energy ETFs with crude oil

In this part of the series, we’ll look at the correlations of top energy ETFs with crude oil (SCO) (DWTI) and natural gas (BOIL) (GASL). At ~80.3%, the VanEck Vectors Oil Services ETF (OIH) had the highest correlation with US crude oil between July 25, 2016, and August 25, 2016.

Below are the correlations of the top energy ETFs with US crude oil over the last month:

  • Energy Select Sector SPDR ETF (XLE): ~75.4%
  • Alerian MLP ETF (AMLP): ~74.0%
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ~80.1%

Over the last three months, XOP had the highest correlation of ~81.9% with US crude oil. XLE, AMLP, and OIH had correlations of ~75.1%, ~58.6%, and ~75.3%, respectively, during the period. XOP’s correlation with crude oil fell in the last month compared to the last three months. The correlations of the other three ETFs with oil rose in the past month compared to the last three months.

Historically, XOP has a higher correlation to crude oil than other ETFs. It tracks crude oil more closely because it has more upstream companies in its portfolio. But OIH’s high correlation is also understandable since it’s directly linked to upstream company activity.

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How do top energy ETFs correlate with natural gas?

All the ETFs that we’ve looked at in this series saw their correlations with natural gas rise in the last month compared to the last three months, except OIH.

AMLP currently has the highest correlation with natural gas and the lowest correlation with crude oil among the ETFs we’ve been analyzing. However, all these ETFs are more correlated to crude oil (UWTI) (USO) (DWTI) than to natural gas (GASX) (UGAZ) (DGAZ). So crude oil is the bigger driver for energy ETFs. Positive correlations mean that a rise in crude oil will drive these ETFs higher.

It’s a good idea to watch movements in crude oil in order to understand how these ETFs will perform.

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