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Why Exxon Mobil can affect your energy ETF investments

Ingrid Pan, CFA

Why are some investors concerned about Exxon's latest earnings? (Part 6 of 7)

(Continued from Part 5)

Exxon Mobil’s impact

Because of Exxon’s massive scale, it makes up a very large proportion of capitalization-weighted energy ETFs.

Select energy ETF descriptions

Energy Select Sector SPDR ETF (XLE)

This ETF is the largest U.S. energy-focused ETF by total assets ($7.7 billion as of February 5, 2014), which tracks the Energy Select Sector Index, a cap-weighted index that aims to track the energy companies that are part of the S&P500. Exxon Mobil makes up 16% of XLE by market cap, and XLE holds a total of 46 securities.

Vanguard Energy ETF (VDE)

The Vanguard Energy ETF is a cap-weighted U.S. energy-focused ETF (total assets of $2.4 billion as of February 4, 2014), which tracks the MSCI US Investable Market Energy Index. The index represents the energy companies of the MSCI US Investable Market 2500 Index. So VDE contains several companies with smaller market caps that wouldn’t be found in the S&P 500, and which therefore wouldn’t be found in the XLE ETF. But the two ETFs correlate very highly (0.99 over the past 12 months). VDE holds 161 different securities, as opposed to XLE’s 84. Exxon Mobil makes up 22% of VDE by market cap.

iShares US Energy ETF (IYE)

The iShares US Energy ETF is a cap-weighted U.S. energy-focused ETF (total assets of $1.8 billion as of February 4, 2014), which tracks the Dow Jones US Energy Sector Index. The index is designed to measure the stock performance of U.S. companies in the oil and gas sector. IYE has 84 securities and also highly correlates to both XLE and VDE, with correlation coefficients of 0.99.

Given Exxon Mobil’s heavy weighting in these funds, the company’s performance can have a large effect on the performance of these ETFs.

Exxon’s stock performance highly correlates to the performance of these energy ETFs. This isn’t only because Exxon makes up a significant proportion of the total composition of the ETFs, but also because any of the other companies that the ETFs hold, such as Chevron (CVX), are exposed to the same factors as Exxon (for example, crude oil prices, natural gas prices, and oil service costs).

Though XOM highly correlates to energy ETFs, it has underperformed them on a total return basis lately. To see why, please continue to the next part of this series.

Continue to Part 7

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