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6 Canadian Oil ETFs You Have to Look at in October

Posted on June 3, 2021 by Dan Kent

In a follow-up to our article on Canadian ETFs for dividend and growth, we are drilling down a little further, pun intended.

We're going to be talking about some of the best Canadian oil and gas ETFs in this article.

The rising cost of crude oil is causing investors to once again pay attention to oil stocks. However, many are unsure when it comes to picking individual producers. That's why exchange traded funds make excellent options.

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.

This is exactly where we spin back to the top Canadian oil and gas ETFs here in Canada

Most all of these top oil ETFs below provide instant diversification to the sector, which could see considerable upside in 2021 and 2022.

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 timing the market.” 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.

What are the best Canadian oil etfs?

Horizons NYMEX Crude Oil ETF (HUC)

If you're looking for exposure to WTI futures, this is going to be an oil ETF you want to have a look at.

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

You won't see a holdings table on this ETF, as it exclusively holds those futures contracts.

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 movement 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.

The pandemic has created a unique situation in which this has not occurred, as both seem to be recovering uniformly as the economy opens back up. But, once life gets back to normal, this trend might go away.

Daily volume is just over 5300 shares for this oil ETF, and it's relatively small with only $43 million in assets under management. With fees of 0.88%, it's the highest on the list. But considering it's so specialized and actively managed, we're not surprised by this.

HUC 10 year performance

TSE:HUC 10 Year Performance

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

wdt_ID Company Weight
1 Canadian Natural Resources (CNQ) 25.55
2 Suncor Energy (SU) 24.40
3 Cenovus Energy (CVE) 11.82
4 Imperial Oil (IMO) 8.62
5 Tourmaline Oil (TOU) 7.81
6 Arc Resources (ARX) 5.90
7 Whitecap Resources (WCP) 2.69
8 PrairieSky Royalty (PSK) 2.65
9 Crescent Point Energy (CPG) 2.58
10 Meg Energy (MEG) 2.49

When we look at XEG, we see an oil ETF that contains some strong exposure to Canada's top companies, but also one that is extremely top heavy. We have the top 10 holdings listed above, but the ETF only has 13 total holdings total.

As a capped index, 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 major producers such as Canadian Natural Resources and Suncor. As such, two companies account for practically 50% of the ETFs overall performance.

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, the performance of this ETF is dependent on the majors. This is not necessarily a bad thing, but we have seen a company like Suncor struggle exponentially despite oil making a big comeback in late 2020 and 2021.

This is by far Canada's most popular oil ETF, with daily volume in the 1.5 million share range. In fact, this will trump the other ETFs on this list by a longshot. In terms of fees however, it comes it at once of the highest of the non futures-based ETFs at 0.61%.

The fund pays a distribution of 1.71%, and has just over $1.3 billion in assets under management.

XEG 10 year performance

TSE:XEG 10 Year Performance

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

wdt_ID Company Weight
1 Keyera Corp (KEY) 10.43
2 Tourmaline Oil (TOU) 10.23
3 Suncor Energy (SU) 9.02
4 Imperial Oil (IMO) 11.07
5 TC Energy (TRP) 10.50
6 Enbridge (ENB) 10.49
7 Pembina Pipeline (PPL) 9.97
8 Inter Pipeline (IPL) 9.78
9 Canadian Natural Resources (CNQ) 9.33
10 Cenovus Energy (CVE) 9.10

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. As you can tell by the holdings chart, at the time of writing there is a 2% difference from the top holding to the tenth holding.

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 significant footing in their respective industries.

In terms of oil ETFs that contain producers, this is the top performing one on this list. However, as you can see below, much like any other oil and gas ETF over the last decade, it has struggled immensely to provide any meaningful return.

This oil ETF has just over $193 million in assets under management, pays a 3.63% distribution, has just over 35,000 shares in daily volume and fees of 0.55%.

ZEO 10 year performance

ZEO Oil ETF Vs TSX

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

wdt_ID Company Weight
1 Inter Pipeline (IPL) 8.22
2 Tidewater Midstream (TWM) 7.93
3 Enbridge (ENB) 8.48
4 Gibson Energy (GEI) 8.35
5 Parkland Corp (PKI) 8.28
6 Pembina Pipe (PPL) 8.28
7 Mullen Group (MTL) 8.77
8 AltaGas Ltd (ALA) 8.75
9 TC Energy (TRP) 8.63
10 Keyera Corp (KEY) 8.57

If we were to pick an oil and gas ETF which would be the "safest", it would likely be HOG.

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 4.17% distribution. Although you will not hit a homerun with this ETF, you will get safe and reliable exposure to the sector with a healthy dividend.

And if we look to the performance chart below, you'll notice one thing. This is the only Canadian oil ETF on this list with positive total returns. The ETF is relatively new, so it only has history back to 2015, and the returns are nothing to write home about.

But, in the oil and gas sector, positive over the last half decade, especially considering the impacts of the pandemic, is a pretty big deal.

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 $22.1 million in assets under management, 8300~ total daily volume and fees of 0.55%.

TSE:HOG Vs TSX Index

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

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.