Investing in Mid-Cap Oil & Gas Companies with SPDR S&P Oil and Gas ETF (XOP)

The SPDR S&P Oil and Gas Exploration and Production ETF (NYSEARCA:XOP) is a fund that invests in mid-cap oil and gas companies. The article suggests that the oil and gas industry may have a positive outlook in the year ahead, making XOP a potential investment opportunity for those looking to invest in the sector. The fund tracks the performance of the S&P Oil & Gas Exploration & Production Select Industry Index, which includes mid-cap companies in the oil and gas exploration and production industry.

The SPDR S&P Oil and Gas Exploration and Production ETF (NYSEARCA:XOP) presents an intriguing investment opportunity for those looking to tap into the oil and gas sector. As the industry navigates a complex landscape in 2025, XOP stands out with its balanced exposure and focus on mid-cap companies. This fund, which tracks the S&P Oil & Gas Exploration & Production Select Industry Index, offers a strategic edge in a market characterized by both uncertainty and growth potential.

Market Outlook and Fund Strategy

The oil and gas industry in 2025 is expected to be both steady and unpredictable, with Brent crude oil prices predicted to range between $70 and $90 per barrel, depending on geopolitical tensions [1]. U.S. oil production is forecast to remain strong, with output near 13.4 million barrels per day, solidifying the U.S. as the world's top oil producer [1]. Meanwhile, M&A activity is a positive sign, with major players like ExxonMobil looking to acquire more assets, which could benefit mid-cap companies [2].

XOP's strategic positioning includes a balanced portfolio with 50 companies, focusing on oil and gas exploration and production (71.60% of the fund), refining and marketing (19.23%), and integrated oil and gas companies (9.17%) [1]. This diversification helps shield the fund against volatility in crude oil prices, as refining profits rise when oil costs decline. Exploration companies can also benefit from higher output or merger premiums.

Financial Metrics and Performance

XOP's expense ratio of 0.35% is lower than its peer, the First Trust Natural Gas ETF (FCG), which has an expense ratio of 0.57% [1]. This cost edge makes XOP an efficient option for long-term investors. The fund's assets under management (AUM) of $1.9 billion provide deep liquidity, resulting in tighter bid-ask spreads and less price volatility. While XOP's dividend yield is slightly lower than FCG, at 2.60% versus 2.89%, it offers a more balanced portfolio with a lower P/E ratio of 11.62 and a P/B ratio of 1.27 [1].

Despite a challenging year, XOP's 1Y return of -11.48% and 5Y return of 22.10% indicate resilience, with the fund's performance outperforming FCG over longer periods [1]. The fund's equal-weighted approach allows smaller firms to drive returns, benefiting from higher output or M&A activity.

Risks and Considerations

Investing in XOP exposes investors to typical oil and gas sector risks, including commodity price volatility, trade disputes, environmental regulations, and political events. However, XOP's balanced portfolio and large AUM mitigate some of these risks. Over the longer term, the rise in electric vehicle (EV) adoption may weaken oil demand, but this impact is expected to be milder in the near future [3].

Conclusion

XOP's balanced exposure, mid-cap focus, and strategic positioning make it an appealing option for investors navigating the complex energy landscape. With a low expense ratio, deep liquidity, and the potential for M&A-driven gains, XOP stands out in the crowded energy ETF field. As the oil and gas industry continues to evolve, XOP's strategic approach could help investors capitalize on the sector's growth opportunities.

References:

[1] https://seekingalpha.com/article/4808651-xop-invest-in-mid-cap-oil-and-gas-companies
[2] https://www.ainvest.com/news/oil-giants-exxonmobil-chevron-profits-plunge-falling-oil-prices-2508/