Correlations of top energy ETFs with crude oil
In this part, we’ll look at the correlations of top energy ETFs with crude oil (SCO) (DWTI) and natural gas (BOIL) (GASL). At ~83.7%, the Energy Select Sector SPDR ETF (XLE) had the highest correlation with US crude oil from October 23 to November 23, 2016.
Let’s take a look at the correlations of the top energy ETFs with US crude oil over the last month:
- Alerian MLP ETF (AMLP) – ~56.3%
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP) – ~82.2%
- VanEck Vectors Oil Services ETF (OIH) – ~71.8%
Over the last three months, XOP had an 81.5% correlation with US crude oil. XLE, AMLP, and OIH had correlations of ~79.2%, ~55.8%, and ~79.2%, respectively, with crude oil during the same period.
XOP’s correlation with crude oil rose in the last month compared to the last three months. During this period, XLE and AMLP also saw their correlations with crude oil rise, while OIH’s correlation fell. Historically, XOP has a higher correlation with crude oil than other ETFs. It tracks crude oil closer because it has more upstream companies in its portfolio.
OIH’s high correlation with crude oil is also understandable. The fortunes of the companies it tracks are directly linked to upstream company activity.
How do top energy ETFs correlate with natural gas?
All of the ETFs that we analyzed in this series saw their correlations with natural gas (UGAZ) rise in the last month compared to the last three months. Currently, XLE has the highest correlation with natural gas among the ETFs that we analyzed. However, all of these ETFs are more correlated with crude oil (UWTI) (USO) than with natural gas (DGAZ). So, crude oil is the bigger driver for energy ETFs. News surrounding OPEC could be an important driver for these energy ETFs. A positive correlation with crude oil means that any move in crude oil driven by OPEC’s decision can impact these ETFs positively or negatively.