Oil & Gas Producer ETFs: Refine Your Exposure
For ETF investors, the key question is not just whether a fund owns โenergy,โ but what kind of energy exposure it packages together. In oil-and-gas producer ETFs, index rules can change the portfolioโs sensitivity to commodity prices, operating margins and cyclical demand. A fund that looks like a clean upstream play may still carry meaningful exposure to businesses with very different earnings drivers.
Weighting methodology matters just as much as sector labels. Modified equal weighting can reduce the dominance of the largest names, while market-cap weighting tends to lean more heavily on the biggest companies. That choice affects concentration, turnover and how quickly the fundโs profile shifts after sector rallies or selloffs. For long-term holders, this is an important reminder that two ETFs with similar names can behave quite differently over a full cycle.
It also helps to look beyond the producer-versus-refiner distinction and think in portfolio terms. A narrower upstream sleeve can improve exposure precision, but it may also increase idiosyncratic risk tied to a smaller set of companies, regions or commodity assumptions. Broader versions may be easier to hold through volatility, yet they can dilute the thesis investors thought they were buying.
For allocation decisions, the practical question is fit. If an energy ETF is being used as a tactical satellite position, purity of exposure may matter more than breadth. If it is intended as a longer-term building block, investors may prefer the version whose index construction best matches their desired balance between concentration, diversification and rebalancing discipline.
Energy investors have a wide range of ETFs at their disposal, whether looking for broad energy exposure or certain subsectors. However, not all subsector ETFs are the same, especially when looking at those focused on oil and gas producers or exploration and production (E&P) companies.
Looking Under the Hood in E&P ETFs
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and iShares U.S. Oil & Gas Exploration & Production ETF (IEO) are sizable E&P ETFs with important differences. XOPโs underlying index uses a modified equal weighting scheme, while IEOโs index uses a modified market cap weighting. XOP includes the integrated majors, Exxon (XOM) and Chevron (CVX), while IEO does not include them.
To be clear, E&Ps are companies that search for and produce oil and gas. Simply put, they extract oil, natural gas, or natural gas liquids from the earth and then make money by selling those commodities. Interestingly, despite their E&P focus, both XOP and IEO include the independent refiners โ Valero (VLO), Marathon Petroleum (MPC), Phillips 66 (PSX), and their smaller peers. As of August 13, refiners represented 16.0% of XOP and 23.8% of IEO as shown below. Within IEO, MPC and PSX were the third and fourth-largest holdings at 9.2% and 7.6%, respectively.
Refiners Are Very Different From E&Ps
Refiners have different profitability drivers than E&Ps. Refiners process crude oil into gasoline, diesel, jet fuel, and other products like asphalt. Refiners make money on the difference between the price of their products and their cost of crude, less their operating expenses. E&Ps benefit when oil and gas prices are higher. Refiners tend to see more benefits when oil and gas prices are lower (natural gas is often used to fuel refineries).
One of the reasons to invest in an oil and gas E&P ETF is to get more exposure to oil and natural gas prices. However, the inclusion of refiners in these ETFs reduces their oil and gas price exposure and introduces different performance drivers. Given their sizable weightings, headwinds for the refining sector could be a drag on performance. Also, a key focus in the energy sector lately has been the long-term benefits for natural gas demand from power-hungry data centers related to artificial intelligence (read more). Refiners will not benefit from rising natural gas demand or higher natural gas prices.
A More Focused E&P Exposure
Investors looking for purer exposure to oil and gas producers may consider the Texas Capital Texas Oil Index ETF (OILT). The ETFโsย underlying indexย screens for companies that produce oil and gas in Texas and constituents are weighted based on the economic value of their oil and gas production in the state with a 10% cap. By focusing on producers, the index does not include any independent refiners and provides purer E&P exposure than XOP and IEO. There are also benefits to focusing on producers in Texas (read more). OILTโs expense ratio of 0.35% matches XOP and is below IEOโs expense ratio of 0.40%.
The outlook for refiners is closely tied to demand for their products like gasoline and diesel, with diesel particularly sensitive to the outlook for the economy and industrial activity. When recession concerns resurfaced and market volatility increased earlier this month, refiners weakened. As shown below, seven out of eight refiners underperformed E&P ETFs month-to-date through August 13. Though downward pressure was broad-based, OILT was more resilient than XOP and IEO.
Bottom Line:
In certain market environments, refining exposure can be a fly in the ointment for E&P ETFs. For investors wanting purer exposure to companies that produce oil and natural gas, OILT may represent a better solution.
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