Content provided by Case Eichenberger, CLS Client Portfolio Manager
Energy and oil funds have been volatile this year (to say the least), a trend that’s continued since the second half of 2014. Take a look at the chart below from January 9, 2015 to August 19, 2015, and you’ll see some bumpy rides for investors in energy (XLE: blue line) and oil (OIL: red line). The price of oil was over $100/barrel back in July 2014 and has since dropped to the $40/barrel range. The volatility shown in the funds below is no surprise.
But take a look at the green line. Still volatile, but in positive territory for the year. That’s not broad equities, it’s actually the United States Gasoline ETF (UGA). Wait, what? Isn’t gasoline refined from crude oil? Yes, it is. Shouldn’t that mean gas and oil are strongly correlated? Not quite. The correlation for gasoline (represented by UGA) to the ETF WTI Crude is 0.796. Not exactly as high or as strong as you may have guessed. Thus the difference in performance year-to-date. UGA is positive, and most other energy-related ETFs are negative.
Why? Correlation is partly responsible, but there are a few other reasons. Strong demand for gasoline and tighter-than-expected supplies have helped raise prices. Several issues with refineries on the West Coast and Indiana – accidents, labor strikes, etc. – have caused a shrinkage in supply and an increase in prices.
Of course, experiences at gas pumps around the nation may be a little different. But, the variations are simply more evidence that correlations between markets may not always work the way you think. Many external factors affect the markets every day.
At CLS, we build globally diversified portfolios that contain many different asset classes and securities. We hold a slight tilt to the energy sector based on low valuations (it’s cheap) and a belief that global consumption should continue to improve, keeping demand for energy up.
The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing.
The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
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Correlation is calculated into a correlation coefficient, which ranges between -1 and +1. A correlation co-efficient of +1 implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, -1 correlation coefficient means that if one security moves in either direction the other security will move in the opposite direction. If the correlation is 0, the movements of the securities has no correlation.