2 Jun

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

WRITTEN BY Rabindra Samanta

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%

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

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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