Rebalancing All-Weather: Why BP Outperforms XLE for Energy Exposure

In the evolving landscape of portfolio construction, the All-Weather framework-rooted in risk-parity principles-has gained traction for its emphasis on balancing risk across asset classes. This approach prioritizes instruments with lower volatility, stable cash flows, and asymmetric downside risks. When evaluating energy exposure, the choice between BP PLC (BP) and the Energy Select Sector SPDR ETF (XLE) is critical. While both offer access to the energy sector, BP's lower volatility, superior risk-adjusted returns, and diversified operations make it a superior fit for risk-parity portfolios, particularly under shifting macroeconomic conditions.

Volatility and Beta: A Tale of Two Instruments

Risk-parity portfolios thrive on assets that minimize systemic risk. XLE's beta of 0.50 relative to the market indicates its volatility is 50% of the broader market's. In contrast, BP's beta is reported at 0.05 (5Y Monthly), suggesting its returns are nearly insensitive to market fluctuations. This stark disparity underscores BP's ability to decouple from market turbulence-a key attribute for risk-parity strategies.

Historical volatility further highlights this divergence. XLE's 60-day close-to-close volatility stands at 17.48% as of December 2025, reflecting the inherent instability of energy sector ETFs. BP, however, lacks a direct volatility metric in the data, but its beta implies a far smoother ride. For risk-parity portfolios, where volatility is weighted inversely to allocation, BP's lower beta allows a larger position without overexposing the portfolio to energy sector swings.

Maximum Drawdown: Resilience in Crisis

Energy assets are notorious for sharp corrections, but BP's historical resilience offers a compelling case. While XLE endured a maximum drawdown of -71.26% from June 2014 to March 2020, BP's Value At Risk of -2.02-a statistical measure of potential loss-suggests a more contained downside. Though BP's exact maximum drawdown for 2020–2025 is unspecified, energy positions during the 2020 crisis faced synchronized drawdowns exceeding -60% according to analysis. By comparison, XLE's drawdowns were far more severe, requiring 93 months to recover from a -63.91% peak-to-trough decline over 30 years according to data.This asymmetry in downside risk makes BP a more palatable choice for portfolios seeking to avoid prolonged underperformance.

Diversification and Portfolio Alignment

BP's diversified energy portfolio-spanning oil, gas, and renewables-further enhances its suitability for risk-parity frameworks. Unlike XLE, which aggregates exposure to energy equities (often concentrated in upstream producers), BP's operations include downstream refining, chemicals, and low-carbon investments. This diversification mitigates sector-specific shocks, such as those from oil price swings or regulatory shifts. For instance, while XLE's performance is tethered to the cyclical fortunes of energy stocks, BP's mixed revenue streams provide a buffer against volatility.

Conclusion: A Strategic Edge for Risk-Parity

In an All-Weather portfolio, the goal is to align assets with their risk contributions. BP's near-negligible beta, coupled with its historical resilience and operational diversification, positions it as a superior energy exposure vehicle compared to XLE. While XLE's high volatility and severe drawdowns make it a risky bet for risk-parity strategies, BP's stability and asymmetric downside offer a more balanced approach. As macroeconomic conditions continue to shift, investors would be wise to prioritize BP's lower risk profile to maintain portfolio equilibrium.