Why Energy ETF Investors Should Watch Crude Oil



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) and natural gas (BOIL) (GASL). At ~57.5%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) had the highest correlation with US crude oil from December 12, 2016, to January 12, 2017.

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) at ~48.1%
  • VanEck Vectors Oil Services ETF (OIH) at ~43.2%
  • Energy Select Sector SPDR ETF (XLE) at ~52.9%

Over the last three months, OIH had an ~72.2% correlation with US crude oil. XLE, AMLP, and XOP had correlations of ~72.1%, ~52.6%, and ~70.5%, respectively, during the same period.

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In the last month, all of the ETFs in our analysis—AMLP, OIH, XOP, and XLE—saw their correlations with crude oil fall compared to the last three months. Historically, XOP had 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 also saw their correlations with natural gas (UGAZ) fall in the last month compared to the last three months. In the trailing month, XOP has the smallest negative correlation with natural gas among the ETFs that we’re analyzing.

However, all of the ETFs are more correlated with crude oil (USO) than natural gas (DGAZ). So, crude oil is the bigger driver for energy ETFs.

A positive correlation with crude oil means that any move in crude oil can impact these ETFs directly. If crude oil goes up, these ETFs will also gain. So, it’s a good idea to watch crude oil’s (UCO) (BNO) movements in order to understand how these ETFs will perform.


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