A Quantitative Look at Your Energy Portfolio



Correlation with US crude oil

On June 26–July 3, major energy ETFs had the following correlations with US crude oil active futures:

  • the VanEck Vectors Oil Services ETF (OIH): 61.9%
  • the SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 57.8%
  • the Energy Select Sector SPDR ETF (XLE): 54.4%
  • the Alerian MLP ETF (AMLP): 5.6%

US crude oil active futures fell 3.4% last week, which might have been behind the downside in most of these ETFs. XOP, OIH, and XLE fell 2.5%, 0.8% and 0.7%, respectively. However, AMLP, which had the least correlation with oil, rose 2.4%.

Natural gas

In the trailing week, XOP, OIH, XLE, and AMLP had correlations with natural gas active futures of 17.3%, 5%, 1.7%, and -14.3%, respectively. Natural gas active futures have risen 1%. Based on the correlations and returns, most of these energy ETFs might have ignored natural gas prices.

Equity markets

Energy ETFs had the following correlations with the S&P 500 in the last week:

  • XLE: 79.8%
  • AMLP: 71%
  • OIH: 69%
  • XOP: 60.7%

The S&P 500 (SPY) rose 2.8% between June 26 and July 3. These correlations suggest a direct relationship between these energy ETFs with the broader market sentiments. The broader market sentiments are usually more important to energy ETFs than the movement in oil prices. The rise in broader markets could influence the out-performance of AMLP.

US equity indexes

In the trailing week, US equity indexes’ correlations with US crude oil active futures were:

  • the S&P 500 (SPY): 80.1%
  • the S&P Mid-Cap 400 (IVOO): 57.2%
  • the Dow Jones Industrial Average (DIA): 41.2%

These three equity indexes have exposure of ~3.6%, ~5.2%, and ~5.1% to the energy sector, respectively. The equity indexes rose 2.8%, 3.4%, and 1.6%, respectively, on June 26 to July 3, while US crude oil active futures fell over three percentage points.

Oil and equity indexes

The above figures indicate a stronger direct relationship between oil and US equity indexes. But, individual factors dominated the oil and the equity market. OPEC missed market expectations due to an increase in the output cut rate. Easing trade war concerns played an important role for the equity market.

Energy and broader markets

In the trailing week, the Energy Select Sector SPDR ETF (XLE) fell 0.7%, the only decline among the SPDR ETFs. The fall in oil prices pulled XLE’s returns into the red territory. The broader market could have supported XLE. The Real Estate Select Sector SPDR Fund (XLRE) rose 4.3%, the highest rise in the SPDR ETFs that divide the broader market into different sectors.

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