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Best Oil ETFs to Watch

Mar 7, 2022

By:James Blakeway

As the world watches the continued tragedy unfold in Ukraine, commodity markets demonstrate further volatility. The oil markets repeatedly make headlines as WTI crude oil futures (/CL) surpass price levels not seen in the past decade. Last Thursday saw the front month, April /CL, contracts trade above $116.50 per barrel, before closing at $108.50. Keep in mind that the futures ended 2021 below $76.

The intra and inter-day volatility in crude oil maybe here to stay for the time being. Meaning that traders should be prepared for further swings in the oil contracts and impacts throughout the markets. This perhaps begs the question: “how can an investor get exposure to the oil markets without trading futures?”

Top 3 oil ETFs to watch

1. United States Oil Fund (USO)

2. S&P Energy Sector ETF (XLE)

3. S&P Oil and Gas Exploration and Production ETF (XOP)

There are multiple exchange-traded securities available that move with the price of oil due to their direct relationship to the commodity. One such product is the United States Oil Fund (USO) which provides investors access to a portfolio of oil futures. Additionally, there is the XLE, SPDR S&P Energy Sector exchange-traded fund (ETF), which tracks all the energy stocks in the broader S&P 500 index. Lastly, there is the SPDR S&P Oil and Gas Exploration and production ETF (XOP). For XOP, the portfolio focus is in the name. 

All three of these ETFs outpaced the S&P 500 for the start of the year. All posting returns over 20%, while the S&P 500 ETF is down around 10% year-to-date.

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Whether trading the shares of these funds or utilizing the options contracts, it’s useful to know the construction of each product.

To trade oil ETFs, oil futures, and more, open an account on tastyworks

1) United States Oil Fund – USO

USO is a unique fund and rather complex compared to a traditional stock-based ETF. USO’s portfolio is constructed from oil futures. The fund purchases contracts of the /CL futures and must roll the contracts to new months as they approach settlement. Currently, the portfolio targets around 20% in the May futures and 20% in the June futures. This means that USO exhibits a lower sensitivity to prices in the Oil market currently, as the active April futures move more aggressively than the May or June contracts. So, while USO provides exposure to the oil futures market, it does not directly track the more volatile, front month futures.

2) SPDR S&P Energy Sector ETF - XLE

XLE provides traders and investors access to all energy stocks within the S&P 500, a total 21 stocks comprising 3.8% of the index. Here are the top 10 current holdings:

xle-etf-holdings.png

XLE holds its positions in the same proportions they maintain in the overall index. Exxon Mobil (XOM) comprises around 0.92% of the S&P 500 but 23% of XLE. Investors or traders with positions in XOM or Chevron (CVX) which makes up 21% of XLE, may want to consider this before adding XLE positions.

3) SPDR S&P Oil and Gas Exploration and Production ETF – XOP

Compared to XLE, the Oil and Gas Exploration and Production ETF has a much more diverse portfolio of holdings, including 59 different stocks with no one holding accounting for more than 3% of the overall fund:

xop-etf-holdings.png

XOP may fit portfolios looking to add diverse positions that are not tied to the largest oil and energy companies in the S&P 500. However, it is worth noting that if traders add both XOP and XLE positions, the two funds are highly correlated to one another at around 0.83 currently.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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