Oil is on fire this year, and while crude is one of 2019’s best-performing commodities, some energy sector exchange traded funds (ETFs) are lagging the returns of oil ETFs that are futures-based strategies.
Here is an interesting dichotomy: the United States Oil Fund (NYSEARCA:USO), which tracks West Texas Intermediate futures, entered April 23 with a year-to-date gain of 41.50%. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP), one of the oil ETF’s most intimately correlated to crude prices, was up “just” 24.60% year-to-date as of April 22.
Among equity-based oil ETFs, XOP is a popular and volatile option. To the latter point, if 2019 ended today, XOP’s annualized volatility would be 31.60% compared to 23.80% for USO and just 17.70% for the Energy Select Sector SPDR (NYSEARCA:XLE), the largest equity-based oil ETF.
The $2.29 billion XOP, which turns 13 years old in June, tracks the S&P Oil & Gas Exploration & Production Select Industry Index. This oil ETF “seeks to provide exposure the oil and gas exploration and production segment of the S&P TMI, which comprises the following sub-industries: Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing,” according to State Street.
Calm Seas for XOP
Given XOP’s penchant for volatility, the ETF has recently been calm and steady. That is somewhat surprising when considering the spate of potential headline risk that oil ETFs have recently encountered. Earlier this week, the Trump Administration said the U.S. is nixing sanction waivers on Iranian oil next month, a move that sent crude prices soaring.
Additionally, XOP has been under the earnings microscope in significant fashion since last week. While this ETF is an equal-weight fund where none of the 64 components exceed weights of 2.71%, large amounts of earnings reports in condensed time frames can affect equal-weight ETFs.
This week, more than 24% of XOP’s holdings report first-quarter results. Next week, that number swells to 51%, meaning this oil ETF could face significant earnings-related tests in the coming days.
“On Q1 earnings calls from some of the major energy companies, investors might want to keep their ears open for any observations of industrial demand, in part because the Fed and various data have pointed to softening capital expenditures recently by many companies,” J.J. Kinahan reports in Forbes. “Crude producers might be among companies that see a negative impact if businesses project slower growth and cut back on spending.”
Another factor to consider with XOP and other oil ETFs is U.S. output. The U.S. pumping about 12 million barrels per day, record levels for oil production here. Even with that robust output, more rigs are coming online in the U.S. For much of this year, the factor bolstering oil prices has been declining production from some members of the Organization of Petroleum Exporting Countries (OPEC).
Even with its impressive year-to-date performance, XOP still has some work to do. The ETF still labors below its 200-day moving average, which is almost 7% away. A move above that technical hurdle could spark a new wave of buying in.
Currently, XOP resides more than 27% below its 52-week high. With the fund already up 24% this year, a return to that 52-week high is not impossible, but investors may do well to not expect the oil ETF to finish 2019 with a gain of around 50%.
From 2013 through 2018, the best annual performance notched by XOP was in 2016 when the oil gained 38.30%.
Todd Shriber does not own any of the aforementioned securities.