The momentum established by the energy sector last year is carrying over into 2022 as the group again ranks near the top among the 11 S&P 500 sectors.
Predictably, that’s a boon for oil services equities and exchange traded funds, such as the VanEck Vectors Oil Services ETF (NYSEArca: OIH). After returning 21.3% in 2021, OIH is higher by 27.28% year-to-date, reminding investors that oil services stocks are highly correlated to crude prices.
In fact, the relationship of OIH components to oil prices is one of the primary factors that drive the ETF’s performance, and that’s something investors should not overlook.
“Because of this relationship, oil services, and thus OIH, have historically had a higher correlation and beta to oil prices than other more diversified sub-industries such as integrated companies or downstream segments such as refining. However, while the oil service industry is certainly dependent on oil prices, it is not the only factor,” writes Coulter Regal, VanEck associate product manager.
OIH follows the MVIS® US Listed Oil Services 25 Index (MVOIHTR), and while the ETF won’t deliver returns that exactly mirror those of spot oil prices, it is a credible equity-based avenue for investors looking for crude-correlated exposure because when oil prices are high, producers tend to spend more on the services and technologies provided by OIH member firms.
In addition to being a valid play on oil prices, OIH offers other benefits as well. Those include inflation protection, which makes sense because natural resources stocks historically perform well against the backdrop of rising consumer prices.
“One of the primary benefits is inflation protection. Energy-related equities, such as oil services companies, have historically performed well in inflationary economic environments, which has become a growing concern for many investors of late,” adds Regal. “Another benefit is participation in global growth. Commodities and natural resources equities (including oil services) may allow investors to participate in global growth as demand increases for energy worldwide.”
OIH’s utility as an inflation-fighting tool is confirmed by the fund’s inclusion in the VanEck Inflation Allocation ETF (RAAX). As its name implies, RAAX is designed to provide investors with exposure to a broad basket of investments that have reputations for proving durable when inflation runs hot. OIH accounts for 3.11% of the actively managed fund’s weight.
Oil services exposure “may potentially help provide some of the benefits highlighted in the above question such as inflation protection, participation in global growth as well as diversification. Additionally, because of 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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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
