Oil's Rise May Be Dangerous For Some ETFs


There are no more airline ETFs, which is a shame because with oil prices soaring due to the specter of military conflict with Syria, traders would probably like to make some easy money.

Easy money includes shorting airlines when oil prices. Shares of Delta (NYSE:DAL), the largest U.S. carrier, are down 10.4 percent in the past month.

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Over that same four-week span, the U.S. Oil Fund (NYSE:USO) is higher by about 5.5 percent. USO tracks near-month West Texas Intermediate futures contracts. Due to fund's need to roll those contracts, it is expensive (by the standards of ETFs) and can deliver returns that are not always on par with those offered by oil in the futures market.

Related: Transports ETF Defies Surging Oil Prices.

USO is not a perfect ETF, but it is current flirtation with $40, which coincides with WTI for October delivery ominously flirting with $110 barrel, is worth monitoring. Past trips to around and above for USO have not been good news for popular energy ETFs such as the Energy Select Sector SPDR (NYSE:XLE) and the Vanguard Energy ETF (NYSE:VDE).

Investors do not have to go back too far for confirmation. On February 20, 2012, USO closed around $42. By June 18, it was barely above $30. Over that period, XLE, the largest energy ETF by assets, and VDE, the energy ETF with the lowest expense ratio, plunged an average of 13.3 percent.

That is far from the only example of USO putting stress on energy stocks. From April 18, 2011 through September 26, 2011, USO plunged 26.6 percent. XLE and VDE each lost 19.5 percent over the same time.

Interestingly, XLE, VDE and comparable energy ETFs practically advertise the fact that they will fall mightily when oil prices do the same because the top holdings in these ETFs are not great performers when crude futures rise too much too fast. Sure, Exxon Mobil (NYSE:XOM) gained over two percent Wednesday, but heading into the start of trading for that day, shares of the largest U.S. oil company were down 7.7 percent in the past month.

Rival Chevron (NYSE:CVX), the second-largest U.S. oil company, was better by comparison with a one-month loss prior to Wednesday of 5.8 percent. Those stocks combine for almost 30.8 percent of XLE's weight and 36.4 percent of VDE's weight. In both cases, those weights are more than enough to determine the fates of these ETFs.

One more example: From April 12, 2010 through May 17, 2010 slid 17.2 percent. Over the same time, XLE and VDE lost an average of 7.3 percent.

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Disclosure: Author does not own any of the securities mentioned here.

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