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Oil Prices Are Falling: Should We Be Cautious of Energy ETFs?

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How energy ETFs fared last week

Below are the performances of four major energy ETFs between May 25, 2017, and June 1, 2017:

  • VanEck Vectors Oil Services ETF (OIH): unchanged
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP): fell 2.5%
  • Energy Select Sector SPDR ETF (XLE): fell 1.0%
  • Alerian MLP ETF (AMLP): fell 1.6%
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Energy ETFs and their correlation with crude oil

With a correlation of 40.0%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) had the highest correlation with US crude oil (USO) (UCO) between May 25, 2017, and June 1, 2017. Crude oil prices fell 1.1% in that period. Below are the correlations of the other three energy ETFs with US crude oil during that time period:

  • Energy Select Sector SPDR ETF (XLE): 34.2%
  • Alerian MLP ETF (AMLP): 7.5%
  • VanEck Vectors Oil Services ETF (OIH): 9.2%

Natural gas could have also impacted these energy ETFs between May 25, 2017, and June 1, 2017. All the energy ETFs had a positive correlation greater than 40.0% with natural gas prices during that time period. However, in the last three months, oil prices had a greater impact on these energy ETFs than natural gas, based on the correlations.

Is the broader market impacting energy ETFs?

Based on their correlations with the S&P 500 Index (SPY), all these four energy ETFs could derive important cues from the broader commodities compared to the energy commodities. All of them have a correlation greater than 55.0% with the S&P 500 Index between May 25, 2017, and June 1, 2017.

The broader market plays a vital role in the sentiment related to energy ETFs. But historically, crude oil has been more important to these energy ETFs than the broader markets.

It’s probably a good idea to mainly track oil in order to understand the possible ups and downs of energy ETFs.

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