Oil Price vs. Oil Company ETFs: No Difference, Right?

Oil stocks just follow the price of oil, right? Wrong.

True, they often move in sync. When they don’t, investment advisors should pay extra attention. 

When they go their separate ways, clients may get confused, by thinking they should be making money on their “energy” allocation while feeling like they just drilled a dry hole. 

Comparing a pair of ETFs as a proxy for the two versions of oil investing most familiar to investors may be helpful. The Energy Select SPDR (XLE) owns all the energy stocks within the S&P 500, though Exxon Mobil Corp., Chevron Corp. and ConocoPhillips comprise nearly half the assets in this focused large cap fund. Representing the price of oil, the Pro Shares K-1 Free Crude Oil Strategy (OILK) provides exposure to U.S. domestic fossil fuel, priced as West Texas Intermediate oil. 

Over the past 12 months through Friday, OILK gained just over 11% and XLE added just under that amount. Like twins, eh? But if that were the case, last month’s 6% gain by XLE versus just a 1% advance for OILK wouldn’t make sense. Perhaps the two were separated at birth. 

Performance of Oil Stocks Versus Oil Price 

Many things effect oil and oil stocks. Crude price is a major reason for them to correlate, since big energy’s profit margins rely to some degree on the price trend of the underlying commodity. There's a fixed cost of production and when the price of oil drops too low, less drilling tends to be done, since the price these giant companies can receive for what they find in the ground is less attractive to them. 

In addition, XLE owns real, live businesses, that manage profits, fund their dividend through earnings strategy, and manage people count, among many activities performed by all public companies. OILK represents the price fluctuations of a set of derivative contracts tied to crude oil. 

So, when the stock market is doing well, XLE can move up with it, and vice versa in a down stock market, regardless of what the price of oil is doing on the commodity exchanges. That is, oil stocks act like oil, stocks, or both, depending on the market’s sentiment toward each. In addition, there was a time when energy was the largest sector of the S&P 500, so flows into and out of index funds mattered to the price of stocks inside of XLE, but not to OILK. But energy is a puny part of the S&P 500 currently, so this is likely a less significant factor these days. 

Choosing XLE or OILK: a Matter of Preference

Finally, to quantify this relationship between oil stock ETFs and oil price ETFs, I looked back at the 6-month rolling returns (monthly moving windows) of XLE versus OILK. While there were plenty of periods in which the two funds ran up or down together, each has had several half-year time frames in which it outperformed the other by 20% or more!

So, the bottom line for advisors is to understand that oil stocks and oil prices are similar, but not the same. Explaining this to clients and counseling them when it comes to their investments in this popular market segment is one of the many aspects of investment advice that can differentiate an advisor from their peers.