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6 Canadian Oil ETFs You Have To Look At

Posted in on March 26, 2019 by Mathieu Litalien

Disclaimer: The writer of this article may have positions in securities listed below. Stocktrades may also be compensated via affiliate links in the post below

In a follow-up to our article on Canadian ETFs for dividend and growth, we are drilling down a little further. Today, we are presenting some of the best Canadian oil ETFs in the country.

Why Exchange Traded Funds (ETF)?

In short, ETFs are a much better alternative to Mutual Funds as they have much lower fees. For those who don’t have the time, or know-how to buy individual stocks in Canada, ETFs are a great way to passively invest. Finally, they provide instant diversification, a key factor in successful investing. There is even the iShares S&P/TSX Smallcap Index (TSE:XCS), that covers small cap Canadian stocks.

Circling back to diversification, ETFs provide DIY investors with an easy investment alternative by industry. You can find Canadian growth ETFs, Canadian dividend ETFs or even ETFs that track a whole index.

On a personal note, the majority of my portfolio consists of individual equities but I have one Canadian real estate investment trust (REIT) ETF in my portfolio. Why? Simply put, I don’t have the time and can’t dedicate the effort to research individual companies in the sector.

ETFs are a solution to this, in any industry

Graph courtesy of Business Insider

The same concept is applicable to those unsure of what to buy in the Oil & Gas sector. Whether you are just starting out, or an experienced investor who just does not feel comfortable picking stocks in the sector, the answer is not sitting on the sidelines.

As the saying goes “time in the market is better than time out.” This has proven to stand the test of time.

Taking a position in Oil & Gas ETFs is one of the best options to diversify and gain exposure to the sector.

With that in mind, here are some of Canada’s best Oil & Gas ETFs.

Best Canadian Oil ETF For Exposure to Oil Futures – Light Sweet Crude

Horizons NYMEX Crude Oil ETF (HUC)

Holdings: N/A

Dividend Yield: N/A

Net Assets: $18.8 million

Fees: 0.87%

Returns: 1 YR: 7.21%  3 YR: 11.62% 5 YR: -9.70%, 10 YR: N/A

Simply put, this ETF seeks to track the performance of NYMEX light sweet crude oil futures contracts for the next December delivery month. Light sweet crude is also known as West Texas Intermediate (WTI), the benchmark for North American crude oil.

As NYMEX light sweet crude trades in U.S. dollars, it is important to note that the ETF is also hedged against the CAD. As an actively managed oil ETF, its fees are higher than your typical ETF.

Likewise, it is highly volatile which is not surprising as it tracks the price of oil prices.  

The ETF can act as a hedge against the broader U.S. market as it has very low correlation to the S&P 500. In other words, it tends to do well when U.S. stocks struggle and underperform in bull markets.

Best Canadian Oil ETF For Exposure to Oil Futures – Canadian Crude

Auspice Canadian Crude Oil Index ETF (CCX)

Holdings: N/A

Dividend Yield: N/A

Net Assets: $10.7 million

Fees: 0.65%

Returns: 1 YR: -1.84%  3 YR: 32.43% 5 YR: N/A, 10 YR: N/A

This is by far the riskiest oil ETF on our list. It also has the potential for significant upside.

The Auspice Oil & Gas ETF is a relatively new offering having only launched in 2015.

It seeks to replicate the performance of the Canadian Crude Excess Return Index, which measures the performance of the Canadian heavy crude oil market. Heavy crude is also known as Western Canadian Select (WCS).

The Auspice Oil & Gas ETF is the only publicly traded product with direct exposure to WCS oil.

Give the current oil glut and lack of pipeline capacity, Canadian crude dove to near all-time lows back in the fall. The price has since rebounded but there is still a gap that exists between Canadian crude and benchmark WTI prices.

Canada needs to figure out its pipeline situation. Canada is in a landlocked situation and the Government of Alberta has been attempting find ways of increasing access to global markets. Until then, Auspice Canadian Crude investors can expect considerable volatility.

If the WCS-WTI spread widens again and hits lows similar to what happened this past year, this oil ETF would be a very attractive play on a price rebound.

Best Oil & Gas ETF For Majors

Ishares S&P TSX Capped Energy Index ETF (XEG.TO)

Holdings: 33

Dividend Yield: 1.98%

Net Assets: $744.7 million

Fees: 0.61%

Returns: 1 YR: -6.38%  3 YR: 2.64% 5 YR: -9.09%, 10 YR: -0.05

At first glance, you might think that this iShares energy ETF is a good option for diversification. The ETF tracks the S&P Energy Index which is comprised of stocks from each industry. The problem however, is that it is a Capped Index @ 25% and is highly concentrated despite having 33 holdings.

This means that no single stock can account for more than 25% of the Index. Although better than a non-capped, the S&P TSX Capped Energy Index still places increased importance the size of the company. The market cap of a security determines the relative weighting percentage within the Index.

In other words, the bigger the market cap, the higher the weighting. The smaller the market cap, the lower the weighting.

The two top holdings include Suncor (SU.TO) at 24.93% and Canadian Natural Resources (CNQ.TO) at 23.84%. As such, two companies account for almost 50% of the Index’s performance. Other big name producers such as Encana (ECA.TO), Cenovus (CVE.TO) and Imperial Oil (IMO.TO) dominate the top 10 holdings.

Although you will get diversification to an extent, the performance of this ETF is dependent on the majors. This is not necessarily a bad thing, investors just need to be aware of highly concentrated it really is and not to put a big emphasis on the high number of holdings.

Best Canadian Oil & Gas ETF For Diversification

BMO Equal Weight Oil & Gas Index ETF (ZEO.TO)

Holdings: 13

Dividend Yield: 3.11%

Net Assets: $147.8 million

Fees: 0.61%

Returns: 1 YR: -2.41%  3 YR: 0.43% 5 YR: -7.72%, 10 YR: N/A

The Oil & Gas industry is broken down into several industries. As per the Global Industry Classification Standards there are six industries – Drilling, Equipment & Services, Integrated, Exploration & Production, Refining & Marketing and Storage & Transportation.

It can be quite daunting for investors to pick top performers in each of these industries. As such, the BMO Equal Weight Oil & Gas Index ETF is a viable alternative for investors. This oil ETF seeks to replicate the performance of an equal weight Canadian large-cap oil and gas companies Index.

The Index has exposure to the leading companies across many the aforementioned industries. It attempts to be a catch-all Index, and reflects the performance of the entire industry.

An equal weight Index gives the same weight to each portfolio in an Index. As such, no one stock will account for significantly more than another in the ETF. Unlike the iShares ETF, this product gives investors a broader exposure to the entire industry and is not as concentrated.

Although this BMO ETF has only 13 stocks, it has exposure to the major players across the sector such as Suncor (SU.TO), Pembina Pipeline (PPL.TO) and Enbridge (ENB.TO).

Best Oil & Gas ETF For Safety

Horizons Canadian Midstream Oil & Gas Index ETF (HOG.TO)

Holdings: 14

Dividend Yield: 4.29%

Net Assets: $10.6 million

Fees: 0.64%

Returns: 1 YR: 8.59%  3 YR: 11.32% 5 YR: N/A, 10 YR: N/A

I know what you are thinking. Safe and the Oil & Gas industry don’t really go hand in hand. I don’t blame you having those views. The industry is highly volatile after all.

However, there is one grouping in the sector that is safer than the others – midstream. What is midstream? To put simply, it is the transportation, storage and processing of oil and gas.

The Horizons Canadian Midstream ETF tracks midstream companies. This includes pipelines, fuel retailers and other transportation companies that move oil & gas products. Although these companies still tend to rise and fall with the price of oil, they are not as susceptible to the significant volatility as produces. Thus, they are safer investments.

They are also reliable dividend payers, evident by the product’s 4.29% yield. Although you will not hit a homerun with this ETF, you will get safe and reliable exposure to the sector with a healthy dividend.

Top holdings include ZCL Composites (ZCL.TO), Shawcor (SCL.TO), Pembina Pipeline (PPL.TO) and Parkland Fuel (PKI.TO). Of note, ZCL is in the process of being bought-out. Once this happens, the ETF will adjust accordingly. I bring this to your attention, as it is currently the midstream ETF’s largest holding.

Best Oil & Gas ETF For Outsized Returns

BMO Junior Oil Index ETF (ZJO)

Holdings: 14

Dividend Yield: 0.82%

Net Assets: $56.4 million

Fees: 0.60%

Returns: 1 YR: -18.21%  3 YR: -4.59% 5 YR: -18.50%, 10 YR: N/A

Junior Oil & Gas companies are often Canadian small-cap stocks and offer high risk-reward opportunities. Not only do they have the price sensitivity of exploration & production companies, they also have additional volatility of small caps.

As such, they tend to have outsized gains when times are good. On the flip side, investors can see significant losses during tough times.

The oil industry has been in a bear market for the better part of the past half-decade.  As such, the fund’s performance is not great. In fact, it launched when WTI was trading above $80 a barrel. Although it enjoyed the ride up in its first couple of years, the fund price collapsed in 2015 along with oil prices. It has yet to recover.

The BMO Junior Oil Index seeks to replicate the North American Junior Oil Index. It does well when the price of oil rises, as this is a boon for companies with large oil reserves.

The fund has 70/30 split exposure to U.S. equities and Canadian equities. As such, you get decent exposure to the booming U.S. energy oil & gas sector. Of note, the U.S. became the largest crude oil producer in the world this past August. It passed previous leaders Russia and Saudi Arabia.

Approximately 50% of the oil ETF is invested in exploration and production companies, and the rest of the portfolio is spread out across the Equipment & Services, Drilling, Refining and Storage industries.

Top Canadian holdings include Vermillion Energy Inc (TSX), Arc Resources Ltd (ARC.TO) and Gibson Energy Inc (GEI.TO). The fund’s top three holdings are U.S. based companies Murphy Oil Corp (MUR), Parsley Energy Inc (PE) and Transocean Ltd (RIG).