7 Canadian Energy ETFs for an Oil & Gas Boom in 2024

WRITTEN BY Dan Kent | UPDATED ON: March 25, 2024

Top oil and gas ETFs

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We have numerous Canadian ETFs that offer extensive exposure to Canada's specific sectors. In this piece, we will discuss some of the top Canadian oil and gas ETFs that are a great addition to your investment portfolio.

In terms of travel, the pandemic is behind us, and many people are itching to get on a plane or hop in their vehicles to take a much-needed vacation. And as a result, energy stocks regained their popularity.

Keep in mind that we will have a wide variety of ETFs inside this article. Pipeline ETFs, ETFs that involve direct exposure to crude, and the most common, an oil and gas production ETF.

Lets look and some of the best oil and gas ETFs to be looking at right now. Remember to click the ticker in the article to view our more in-depth research.

What are the best oil ETFs in Canada right now?

Horizons NYMEX Crude Oil ETF (HUC)

If you're looking for exposure to WTI futures, Horizons NYMEX Crude Oil ETF (HUC) will be an oil ETF you want to look at.

Simply put, this ETF seeks to track the performance of NYMEX light sweet crude oil futures contracts for the following December delivery month.

Light sweet crude is also known as West Texas Intermediate (WTI), the North American crude oil benchmark. As NYMEX light-sweet crude trades in U.S. dollars, it is essential to note that the ETF is also hedged against the CAD.

As an actively managed oil ETF, its management fees are higher than your typical ETF. Right now you'll pay around $8.80 per $1000 invested annually.

Likewise, it is highly volatile, which is not surprising as it tracks the movement of oil prices. The ETF can act as a hedge against the broader U.S. market as it has a very low correlation to the performance of the S&P 500. In other words, it does well when U.S. stocks struggle and underperform in bull markets.

Keep in mind this is a fund that directly plays on the price of crude oil. As a result, it doesn't pay a dividend. This isn't necessarily a fund you'll want to hold for a passive income stream, more so for capital gains.

Additionally, it isn't wise to utilize this ETF as a long-term hold. It is more structured to be buying into and selling out of based on crude movements. Considering the fund has total returns under 1% annualized since its inception, you can likely understand what I'm trying to say. Don't focus on past returns; instead, future results.

With total assets under management of only $26M, it is also a relatively small fund, much smaller than anything else on this list. Overall, if you're looking to skip producers and go right to crude, this is the ETF to do so.

However, if you're looking for exposure to crude with a little bit of leverage, look at the fund below.

BetaPro Crude Oil Leveraged Daily Bull ETF (TSE:HOU)

Just a note before I speak on HOU. BetaPro Crude Oil Leveraged Daily Bull ETF (TSE:HOU) is a leveraged ETF, and thus it will pose significantly more risk than a fund like HUC. Educating yourself on leverage is essential.

It is critical to determine if leveraged funds fit your overall risk tolerance and if you can handle the volatility they present.

This fund aims to deliver twice the daily performance of the Horizons Crude Oil Rolling Futures Index. So if crude oil moves 2% on a particular day, you can expect this fund to move twice that. This sounds great, but it's essential to understand that this works both ways.

Much like HUC, there isn't much more to be said about this fund as its structure is quite simple. You'll pay a pretty penny to hold the fund, though, coming in at $13.40 per $1000 invested annually.

This is a very high management expense ratio. However, very few investors hold a fund like this long term. It has assets under management of around $153M and pays no distribution.

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

When we look at XEG, we see an oil ETF that contains some solid exposure for Canada's top companies but also one that is extremely top-heavy.

It only has 33 holdings, and two of Canada's largest blue-chip energy companies, Suncor Energy (TSE:SU) and Canadian Natural Resources (TSE:CNQ) make up around half of the fund.

As a capped index, 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 (XEG.TO) still places increased importance on the company's size. 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. And this is why you see these two companies dominating the fund. Other big-name producers in this ETF are Cenovus Energy, Imperial Oil Ltd and pure-play natural gas producer Tourmaline Oil.

Although you will get diversification to an extent, this ETF's performance depends on the majors. This is not necessarily bad, but we have seen a company like Suncor lag its peers by a wide margin despite oil making a big comeback over the last few years.

This is Canada's most popular oil ETF, with daily volume in the 1.5 million share range and assets under management of $1.8B. In fact, this will trump the other ETFs on this list by a long shot. In terms of fees, however, it comes at one of the highest of the non-futures-based ETFs at 0.61%, meaning you'll pay $6.10 per $1000 invested.

The fund's current distribution yield is around 3.5%. However, we likely see increased distributions in light of significant cash flow generation by the major oil and natural gas producers inside the fund.

For example, the fund owns Birchcliff Energy, which recently made a whopping 10x increase to the dividend. This will likely be reflected in future distributions from XEG.

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

The Oil & Gas industry is broken down into several subindustries. 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 daunting for investors to pick top performers in these industries. As such, the BMO Equal Weight Oil & Gas Index ETF (ZEO.TO) 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 industries above. It is a catch-all index and reflects the performance of the entire industry.

An equal weight index gives the same weight to each company in an index. As such, no stock will account for significantly more than another in the ETF. However, there are times when the equal-weighted nature of the ETF will deviate.

At the time of writing, it is because of the significant runup in Canadian oil and gas producers and the slower, more drawn-out rise of Canadian pipelines.

So, there's really no sense in talking about the current top holdings of the ETF, as they could be drastically different at the time you're reading this. The easiest way to tell is to head to the fund's official page and check the holdings.

Unlike the iShares ETF, this product gives investors a broader exposure to the entire industry and is not as concentrated. The ETF only contains ten stocks and cuts out a lot of junior producers. In fact, all of the producers and pipeline companies in this ETF have a significant footing in their respective industries.

The ETF has just over $200M in assets under management, pays a 4.5% distribution, and has just over 22,000 shares in daily volume and fees of $6.10 per $1000 annually.

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

If we were to pick an oil and gas ETF that would be the "safest", it would likely be HOG. I know what you are thinking. Safe and the oil & gas industry don't go hand in hand. In fact, we've witnessed numerous collapses in the price of crude over the last decade that have caused significant downfalls in energy companies.

However, one grouping in the sector has been historically safer than the others – midstream companies. What is midstream? Simply put it is the transportation, storage and processing of oil and gas.

The Horizons Canadian Midstream ETF (HOG.TO) 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 significant volatility as producers are.

They are also reliable dividend payers, evident by the product's distribution, which sits in the high 2% range. Although you will not hit a home run with this ETF, you will get safe and reliable exposure to the sector with a healthy dividend.

The ETF is relatively new, so it only has a history dating back to 2015. Its returns are nothing to write home about. Still, it's essential to understand that this fund weathered the pandemic much better than the others on this list.

In fact, we witnessed a fund like XEG lose nearly 90% of its value during the pandemic. HOG on the other hand lost only 59%.

Producer ETFs like XEG are likely to outperform this one moving forward. However, they're also expected to be a lot more volatile.

The ETF has $26M in assets under management, 2200~ total daily volume, and expenses of 0.64%.

The bullish case for Canadian energy stocks and energy ETFs

In 2020, the oil and gas sector was decimated due to the COVID-19 pandemic. Energy companies across the globe saw their stock prices collapse, cash flows cease, and dividends were cut or suspended.

For the most part, it wasn't hard to see how this short-term collapse in crude oil demand was temporary. In fact, we've witnessed a complete 180 in the industry, and now, demand is outstripping supply.

There is also the harsh realization lately that clean energy like solar, wind and hydro are a lot farther away from replacing traditional fossil fuel methods of energy generation than many predicted.

When we consider that a major producer like Canadian Natural Resources has a breakeven price in the $30 a barrel range, we can see how frothy this environment truly is for top-notch producers.

Suppose crude oil can be maintained at $70 a barrel or higher. In that case, energy stocks and oil and gas producers will be able to return significant cash flows to their shareholders via share buybacks and increased distributions, much of which we're already witnessing.

The bullish case for oil companies during inflationary periods

Commodities perform well during inflationary periods. This isn't just crude oil, but metals such as gold and silver. And, unless you've been living under a rock the last year or so, you know that we are seeing the highest levels of inflation we've witnessed in the previous 4 decades.

Yes, it's coming down as the Fed and Bank of Canada aggressively raise rates. However, history has shown it takes inflation a very long time to settle, and we could be dealing with it for years.

So, adding some oil and gas companies to your portfolio today makes sense. Although these companies will likely underperform over the long run, we must look to commodity plays not for their past performance but for future potential.

Commodity prices like oil will rise and fall through different economic cycles, and with it, so will the Canadian energy sector. You'll need to time your exit regarding these types of investments. But, if you catch the industry on an upcycle, money will be made.

But do we buy equity securities in oil and gas companies or use ETFs? Let's take a look.

Why Exchange Traded Funds (ETFs)?

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.

This is because they allow you to buy an entire sector or basket of stocks without having to bet on an individual company to succeed. This is even more critical in the oil and gas sector.

Some companies were coming out of the pandemic that, at the time of writing, have returned in excess of 1000%, while others have fizzled out. Choosing the wrong company could have had you underperforming by a wide margin.

Finally, they provide instant diversification, a critical factor in successful investing. There is even the iShares S&P/TSX Small-cap Index (TSE:XCS), which covers small-cap Canadian stocks.

Most of these top oil ETFs provide instant diversification to the sector, which could see considerable upside in 2024 and beyond.

As the saying goes, "time in the market is better than timing the market." This has proven to stand the test of time. Taking a position in the top Canadian energy ETFs is one of the best options to diversify and gain exposure to the sector.