There are five Canadian energy ETFs available to investors that don’t use covered call strategies.TODD KOROL/Reuters
Long out of favour with investors, the energy sector is hot again thanks to steadily rising oil prices amid rising demand and constrained supply.
For investors in Canadian exchange-traded funds (ETFs), there are ways to play the traditional energy industry comeback story, although fund choices are surprisingly limited.
Several funds were delisted in the 2014-2015 period after oil prices plunged and investor interest moved into hot sectors such as technology.
“There is less out there than there has been in the past,” says Daniel Straus, director of ETFs and financial products research with National Bank Financial Markets in Toronto.
He counts just five Canadian energy ETFs available to investors that don’t use covered call strategies, which is an options strategy used to generate income.
Headlining the group is the iShares S&P/TSX Capped Energy ETF (XEG-T), one of the oldest ETFs in the country (created in 2001) with about $1.6-billion in assets and a management expense ratio (MER) of 0.61 per cent.
The iShares fund is “very top-heavy” with more than 60 per cent of its holding concentrated in just three companies: Canadian Natural Resources Ltd., Suncor Energy Inc. and Cenovus Energy Inc.
“It is a very efficient exposure in terms of piggybacking on the market; XEG would be how you get producers,” Mr. Straus says.
The fund produced a stunning return of 83.7 per cent last year and a year-to-date return of about 19 per cent. (All performance data from Morningstar Canada as of Feb. 9).
Another noteworthy fund for the National Bank analyst is the BMO Equal Weight Oil & Gas Index ETF (ZEO-T), which features a mix of Canadian oil and gas producers and pipelines and has a MER of 0.61 per cent and assets of about $238-million.
“You could say that is less of a pure exposure to the price of oil,” Mr. Straus explains. It may offer better diversification because of equal weighting based on the Solactive Equal Weight Canada Oil & Gas Index.
ZEO performance has trailed XEG’s, producing a 2021 return of 63.7 per cent and a return of 15.4 per cent so far this year.
A relative newcomer is Ninepoint Energy Fund ETF (NNRG-NEO) launched last April which carries a management fee of 1.50 per cent (MERs are determined after an ETF is around for one year).
The fund, which invests in exploration, development and production of oil, gas, coal or uranium, has returned about 26 per cent so far this year. The ETF has assets of about $300-million.
Investors can also look to a pair of funds from Toronto-based Horizons ETFs Management (Canada) Inc.: the Horizons S&P/TSX Capped Energy Index ETF (HXE-T) and the Horizons Pipelines & Energy Services Index ETF (HOG-T).
HXE has similar holdings to the iShares XEG fund but with a heavier weighting on middle-sized producers. It’s also cheaper, with an MER of 0.27 per cent and uses derivatives rather than holding shares in energy producers directly. The dividends are reinvested into the fund.
HXE has not had the dramatic swings year to year of the other Canadian energy ETFs. Last year it generated a price gain of 81.5 per cent and has advanced by about 19 per cent so far this year. It has about $80-million in assets.
The equal-weighted industry approach “kind of hurt on the way down because we have a higher weighting on the junior companies, but it has kind of helped us on the way back up,” says Nicolas Piquard, vice-president, portfolio manager and options strategist with Horizons.
The provider’s HOG pipelines and energy services ETF is something of a relic of the 2014 heyday of energy funds. With expense fees of 0.64 per cent, it produced a gain of 33.9 per cent last year and a return of 7.22 per cent so far this year. The ETF has about $22-million in assets.
Energy services stocks may be less volatile than the price of energy but also offer less potential upside when oil and gas prices are rising rapidly.
Mr. Piquard also manages Horizons Enhanced Energy ETF (HEE-T) which invests in Canadian oil and natural gas producers and uses a covered call strategy to attempt to reduce risk and generate income.
HEE fund charges a fee of 0.85 per cent and returned 80.5 per cent in 2021 and 18 per cent so far this year. It has about $40.3-million in assets.
Mr. Piquard is bullish on oil prices generally and says a lower Canadian dollar will mean higher earnings for domestic energy producers who sell their product in U.S. dollars.
For investors looking for non-Canadian energy producers, the best option would be U.S.-traded ETFs, where the trend is to bigger and cheaper.
“For longer-term investors, I think the energy equity ETFs – the ETFs that invest in the stocks of energy companies – they are the best,” says Neena Mishra, director of ETF research with Zacks Investment Research in Chicago.
At the top of her list is the Energy Select Sector SPDE ETF (XLE-A) which offers exposure to a group of U.S. energy firms heavily weighted to Exxon Mobile Corp. and Chevron Corp. With an expense ratio of 0.12 per cent, it returned 53.3 per cent last year and is ahead 24.1 per cent year to date. It has about US$35-billion in assets.
Ms. Mishra also recommends the Vanguard Energy ETF (VDE-A) with similar exposure to U.S. energy exposure, but smaller with about US$7.3-billion in assets. VDE has an expense fee of 0.10 per cent, it returned 52.6 per cent last year and is ahead 22.5 per cent year to date.
“Those two investors are good for people who believe that this energy [runup] will continue for some time and they want to have a longer-term exposure to energy,” she says.