Market Overview

Refiner-Heavy ETFs Outperforming During Oil's Slump

Refiner-Heavy ETFs Outperforming During Oil's Slump

One of the biggest stories in the financial markets this week has been the precipitous decline of oil futures. The United States Oil Fund (NYSE: USO), which tracks West Texas Intermediate futures, lost 7.4 percent in the first three trading days of the week. That slide includes a 4.1 percent tumble on volume that was more than twice the daily average on Wednesday.

The United States Brent Oil Fund (NYSE: BNO), which tracks the global benchmark contract, was off 7.6 percent through Wednesday. BNO gave up 3.6 percent on volume that was more than triple the daily average on Wednesday.

Clearly, it has been a tough week for the oil bulls, but some equity-based energy ETFs are showing some fortitude in the face of sour headlines. That is to say these ETFs are performing at a rate that is less bad than rival funds. The two "standouts" share one thing in common: Higher exposure to refining equities than is found in many other energy ETFs.

Traders Guy Adami and Joe Terranova both spoke positively about the refiners with Adami particularly bullish on Valero (NYSE: VLO), according to CNBC.

The trade makes sense when crude prices are too high, demand erodes and refining margins are suppressed. Additionally, hedging oil futures at elevated prices increases input costs for refiners, but if oil prices extend recent declines the refiners will benefit from lower input costs.

With no ETF devoted exclusively to refining names, investors looking to get exposure to multiple stocks in this sub-sector will want to consider two ETFs. The IndexIQ Global Oil Small Cap ETF (NYSE: IOIL) is home to several U.S.-based and international refiners. Tesoro (NYSE: TSO) and Sunoco (NYSE: SUN) are the ETFs' third- and fourth-largest holdings, respectively, combining for about 16 percent of the fund's weight.

Refining exposure has not been a silver bullet for IOIL, but the prominence of Tesoro and Sunoco within the ETF is hard to ignore. So is the fact that since the start of the week, while down, has outperformed the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) and the iShares Dow Jones US Oil Equipment Index Fund (NYSE: IEZ).

By name alone, the PowerShares Energy Exploration & Production Portfolio (NYSE: PXE) would sound like an ETF destined to fall during this rough patch for crude and it has. PXE is off 3.4 percent this week, but that is a better run than XOP's.

PXE's top-10 holdings include three pure-play refiners – Phillips 66 (NYSE: PSX), Valero and Marathon Petroleum (NYSE: MPC). Those names combine for 15 percent of the fund's weight. Further down PXE's roster, five more refiners are found, including Tesoro, Sunoco and Holly Frontier (NYSE: HFC). Overall, more than a quarter of PXE's weight is devoted to pure-play refiners.

That combined with heavy exposure to integrated oil stocks should keep PXE performing better than XOP or the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSE: IEO) even as oil prices slide.

For more on refiners and ETFs, click here.


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