When it comes to commodity investing, there is perhaps no corner of the market more popular than crude oil. Whether exposure is captured via futures or equities, this volatile yet often rewarding sector has become one of investors’ favorite tactical (and sometimes long-term) tools. And thanks to the ETF industry, there are now several ways investors can gain cheap and easy access to one of the most heavily-traded segments of the commodities market, through both equities and futures [see What Can You Buy With America's Daily Oil Consumption?].
While many choose to utilize an equity approach to oil–as this strategy avoids the nuances and complexities of futures trading–it is generally advised that investors keep a close eye on crude futures given producers’ dependence on the commodity’s price movements. A closer look at the relationship between oil futures and producers, however, reveals several factors investors should be mindful of.
The chart below highlights three oil and gas exploration and production ETFs, comparing their performances across various time frames to crude oil futures [see Energy Bull ETFdb Portfolio]:
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP, A-)
- Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO, B+)
- Dynamic Energy E&P ETF (PXE, B)
- United States Oil Fund (USO, A)
Across the board, oil producers have fared quite well over the years, generating double digits returns as investors continue to pile into the sector. Crude oil futures, however, have taken several major hits in recent years, primarily due to the global economic slowdown putting significant downward pressure on prices. Nevertheless, investors should still keep a close eye on the relationship between oil futures and producers; once the economy stabilizes, investors may once again see a more positive correlation between the two types of exposure.
Disclosure: No positions at time of writing.