The Unlikely ETF Loser From Gulf Oil Spill

by on May 19, 2010 | ETFs Mentioned:

The Deepwater Horizon Oil Spill has been making headlines for the past month, as escalating estimates of the long-term environmental impact have sparked public outrage and Congressional hearings. Projections of the leak’s size have been all over the board; at least 210,000 gallons of oil but perhaps much more is leaking every day. With the spill cementing its status as one of the worst of all time, “Big Oil” once again has seen its public image dragged through the mud. The companies most intimately involved in the disaster, British Petroleum and Transocean, have endured a public relations nightmare; allegations of lax safety protocols have emerged and the companies have repeatedly stumbled in their efforts to cap the leak as plan after plan was unsuccessful.

Finally, some signs of progress are beginning to show. BP has had some success implementing a tube designed to be placed in the leak and funnel the oil up to the surface, preventing it from spilling into the water. This plan was carried out with promising results. While it has not completely stopped the leak, a considerable amount of oil is now being funneled into the tanks of a ship rather than the Gulf of Mexico.

For BP, however, the damage has already been done. The company has admitted responsibility for the disaster, and has committed to paying for the cleanup costs. As estimates for those expenses continue to climb, hundreds of lawsuits have been filed against the British oil giant, as environmental groups seek punitive damages and devastated businesses seek to recoup losses. BP stock is down nearly 25% since the oil rig collapsed, and the leak has brought promises from Washington to abolish the “cozy relationship” between the oil industry and regulatory authorities.

Great Britain ETF Staggers

The Deepwater Horizon spill has predictably weighed on energy ETFs in recent weeks; the Energy Select Sector SPDR (XLE) is down almost 10% over the last month.

But recent events have also claimed some unexpected ETF victims, including the iShares MSCI United Kingdom Index Fund (EWU). With substantially all of its assets invested in United Kingdom stocks, the link to an oil spill in the Gulf of Mexico might not be immediately obvious. But a look at EWU’s holdings shows the link; about 8% of  EWU assets are in BP, making the energy company one of the fund’s top holdings. As BP has taken a heavy hit since the explosion of the oil rig, EWU has suffered; the UK ETF is down almost 16% over the last four weeks. The spill is estimated to rival the cost of the Exxon Valdez disaster, which ended up costing roughly $8 billion when all was said and done.

Other Woes As Well

While the oil spill is a partial explanation for the fund’s drop, there are certainly other contributing factors. The recent election in the United Kingdom has certainly caused some turmoil. With a hung parliament, and no party winning a clear majority of the seats in the House of Commons, the results seemed uncertain until David Cameron was officially named the new Prime Minister. Still, doubts remain over the coalition government’s ability to tackle the country’s mounting debt problems.

Disclosure: No positions at time of writing.