The momentum established by the energy sector last year continues in 2022, with the group once again ranking near the top among the 11 sectors of the S&P 500.
Predictably, this is a boon for oil services stocks and exchange-traded funds, such as the VanEck Vectors Oil Services ETF (NYSEArca:OIH). After a 21.3% return in 2021, the OIH is up 27.28% year-to-date, reminding investors that oil services stocks are highly correlated to crude prices.
In fact, the relationship between OIH constituents and oil prices is one of the main factors determining ETF performance, and it is something that investors should not overlook.
“Because of this relationship, oil services, and therefore OIH, has historically had a higher correlation and beta to oil prices than other more diverse sub-industries such as integrated businesses or downstream segments such than refining. However, while the oil service industry is certainly dependent on oil prices, it is not the only factor,” writes Coulter Regal, associate product manager at VanEck.
The OIH follows the MVIS® U.S. Listed Oil Services Index 25 (MVOIHTR)and while the ETF does not produce returns that exactly mirror those of spot oil prices, it is a credible equity-based avenue for investors seeking correlated crude exposure, as when oil prices are high, producers tend to spend more on services. and technologies provided by OIH member companies.
Besides being a valid bet on oil prices, OIH also offers other benefits. These include inflation protection, which makes sense as natural resources stocks have historically performed well in a rising consumer price environment.
“One of the main advantages is inflation protection. Energy-related stocks, such as oil service companies, have historically performed well in inflationary economic environments, which has become a growing concern for many investors lately,” adds Regal. “Another benefit is participation in global growth. Commodities and natural resources stocks (including oil services) can allow investors to participate in global growth as demand for energy increases around the world.
The usefulness of OIH as a tool to fight inflation is confirmed by the inclusion of the fund in the VanEck Inflation Allocation ETF (RAAX). As its name suggests, RAAX is designed to provide investors with exposure to a broad basket of investments that have a reputation for proving sustainable when inflation is on the rise. OIH represents 3.11% of the actively managed fund’s weighting.
Exposure to oil services “can potentially help provide some of the benefits highlighted in the question above, such as inflation protection, participation in global growth as well as diversification. Additionally, due to its targeted exposure and liquidity, OIH can also be used tactically by investors to express a short- or long-term view with a highly liquid, low-cost ETF,” concludes Regal.
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