7 Canadian Energy ETFs For an Oil & Gas Boom in 2022

Posted on October 6, 2022 by Dan Kent

There are plenty of Canadian ETFs that provide broad exposure to particular industries here in Canada. In this article, we're going to be talking about some of the best Canadian oil and gas ETFs.

In terms of travel, the pandemic seems to be 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 are regaining their popularity.

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 the demand of crude oil was temporary. In fact, we've witnessed a complete 180 in the industry and now, demand is outstripping supply.

When we consider the fact 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.

If crude oil can be maintained at a $90 a barrel or higher, energy stocks and oil and gas producers are going to be able to return significant cash flows back 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 tend to perform well during inflationary periods. This isn't just crude oil, but metals such as gold and silver as well. 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 last 4 decades.

So, it does make sense to add some oil and gas companies to your portfolio today. Although these companies will likely underperform over the long run, it's important we look to commodity plays not for their past performance, but 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 when it comes to these types of investments. But, if you catch the industry on an upcycle, there is money to be made.

But, do we buy equity securities in oil and gas companies, or do we go with ETFs? Lets 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 when we look to the oil and gas sector. There were some companies coming out of the pandemic that, at the time of writing, have returns 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 key factor in successful investing. There is even the iShares S&P/TSX Smallcap Index (TSE:XCS), which covers small-cap Canadian stocks.

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

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

Keep in mind, that we're going to have a wide variety of ETFs inside of this article. Ones that will not only give you exposure to oil and gas prducers, but potentially even crude oil directly.

What are the best oil ETFs in Canada for 2022?

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.

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 management fees are higher than your typical ETF. Right now you'll pay around $8.90 per $1000 invested on an annual basis.

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 performance of the S&P 500. In other words, it tends to do 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. So, this isn't necessarily a fund you'll want to hold for a passive income stream.

To add to this, it probably isn't wise to utilize this ETF as a long term hold. It is more so structured to be buying into and selling out of based on the movements of crude. Considering the fund has returned under 1% annualized since it's inception, you can likely get an idea of what I'm trying to say.

With total assets under management of only $29M, 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. 

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

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

Just a note before I speak on HOU. This is a leveraged ETF, and thus it will pose significantly more risk than a fund like HUC. It is important to educate yourself on leverage and figure out 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 and all, but again it's important to understand that this works both ways.

There isn't really much more to be said about this fund as its structure, much like HUC, is quite simple. You'll pay a pretty penny to hold the fund though, coming in at $13.60 per $1000 invested on an annual basis. However, very few investors hold a fund like this long term. It has assets under management of around $89M, 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 strong exposure to Canada's top companies, but also one that is extremely top-heavy. It only has 30 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, 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 on 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. 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, 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 lag its peers by a wide margin despite oil making a big comeback over the last few years.

This is by far Canada's most popular oil ETF, with daily volume in the 2 million share range and assets under management of $1.9B. In fact, this will trump the other ETFs on this list by a longshot. In terms of fees, however, it comes it 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 1.96%, however. it's very likely we see increased distributions in light of significant cash flow generation by the major oil and natural gas producers inside of the fund.

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 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 of 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 company in an index. As such, no one 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 funds official page and checking 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 significant footing in their respective industries.

The ETF has just over $245M in assets under management, pays a 2.80% distribution, has just over 113,000 shares in daily volume and fees of $6.10 per $1000 on an annual basis.

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 really go hand in hand. In fact, we've witnessed numerous collapses in the price of crude over the last decade that have caused some large downfalls in energy companies.

However, there is one grouping in the sector that 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 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 producers are. 

They are also reliable dividend payers, evident by the product’s distribution, which sits in the low 3% 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, but it's important 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 $20.5M in assets under management, 10,000~ total daily volume, and expenses of 0.64%.

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 this post.

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 Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.