Hey there, Dan again.
Welcome to another edition of ETF Insights!
Of note, in this edition, I apologize for the lack of visuals. I am currently in between my Ycharts subscription and launching my new research terminal, so I don’t have access to data (yet). Next month’s edition will not have this issue!
In a market where literally everything is being disrupted by AI (according to the headlines, at least), many people have been asking what they should be looking at that’s virtually impossible to disrupt.
In this instance, I believe energy could be a very viable play moving forward. Not only because AI will never be able to get oil or natural gas out of the ground at the expense of oil producers, but also because energy could have substantial tailwinds from the massive buildout in AI.
I’ll go over the situation, the forward outlook, plus so much more. I’ll then give you some potential ETFs to consider for energy exposure.
Energy ETFs seem to offer a pretty compelling way to play this cycle because they blend operational leverage, infrastructure upside, and dividend yield into one diversified basket. Of course, there’s always volatility. Oil and gas prices swing wildly, geopolitics can throw a wrench in plans, and the sector is perpetually underfunded.
Over the years, energy companies have learned their lesson about capital expenditures. For that reason, companies are allocating just about 35% of cash flow to growth and sending the rest to shareholders. This does a few things. First off, it rewards long-term shareholders. But secondly, I believe it puts a floor on valuations, because investors appreciate getting the capital back through dividends/buybacks. It allows them to ride out the cycles.
I think that natural gas is the real factor heading into 2026. LNG Canada’s first cargo shipment marks a big moment: Canada is now a major exporter.
Infrastructure assets like pipelines are becoming more valuable as transport capacity tightens relative to production growth. We know how difficult it has been to get a pipeline built here in Canada, and we’re now starting to see the issues.
At this point, I think energy is less about commodity speculation and more about real physical scarcity. Unless you’ve been living under a rock, you know the world is absolutely desperate for more energy due to AI.
The Structural Bull Market in Energy Has Already Begun
Most investors don’t really get what’s happening in energy right now. This isn’t just another bounce from a spike in oil prices.
The sector’s changed fundamentally since 2015, and what’s playing out looks more like a structural shift that’s been brewing for years.
Canadian oil sands projects take years to build. Offshore fields need massive upfront capital. The industry just isn’t set up to chase demand spikes the way it was back in 2010-2014. Living in Alberta (and working in the industry), I witnessed firsthand how crazy that expansion was.
Now, energy producers run with mid-cycle resilience. They’re getting solid returns at even $60 oil, not needing $100 just to break even. It’s the result of lower costs, better portfolios, and refusing to chase poor barrels.
The market is starting to catch on. XEG, a popular energy ETF here in Canada, is up 50% over the last year.
The Case for Physical Assets
The market spent years rewarding software companies and, over the last while here, AI stories. However, this seems to be shifting to some degree, and the market is now rewarding real-world assets significantly and punishing software substantially. Look no further than the price of gold, silver, oil, etc.
Investors are swapping speculative ideas for things you can actually touch, mine, or measure. If we think about how much AI is going to shake the digital world, it’s fairly easy to have the idea that you should be buying things that AI can’t touch. No matter how much AI changes the world, the one thing it won’t change is how much gold or oil is in the ground.
In addition, infrastructure for AI, data centres, and electricity demand isn’t abundant. In fact, one could argue it’s the bottleneck to the technology at this point.
Sure, you could vibe code a piece of software right now in short order. You know what you can’t vibe code?
Pipelines, power lines, storage facilities, or commodity reserves.
Building new capacity takes years and costs way more than it did a decade ago. You can’t rebuild a 2010 pipeline at 2010 prices.
This is where the trade in physical infrastructure starts to stand out. The pipeline tolling model generates cash flows tied to throughput, not commodity prices, and regulated returns provide downside protection when things get choppy. On the AI side of the fence, there is no downside protection.
If you think tangible asset scarcity is just a narrative right now, you’re dead wrong. It’s a real constraint on the next phase of the world, which many believe to be AI. You can’t download a transmission line or 3D-print a gas compressor station, no matter how clever the tech gets.
This is the case for physical assets. And some could say it’s never been more bullish.
Data Centers, LNG, and the New Demand Floor
The U.S. energy sector is entering what analysts are calling a new era of load growth. After decades of flat electricity demand, something’s shifted. I’m sure you know exactly what it is.
AI data centers are the main driver. These facilities don’t act like traditional power users. Residential heating might spike in winter and fade in spring, but data centers pull power year-round, 24/7.
Have we ever witnessed an asset that is growing as fast as it is, all while demanding the same power demand every second of the day? I don’t think we have.
The numbers are wild. U.S. data center power use is expected to double by 2030, potentially hitting 9% of total U.S. electricity generation. A single ChatGPT query uses more than 10x the power of a traditional search.
Renewable power seems like the solution. However, it gets very messy. Grid reliability matters more than the energy source when you’re running non-stop, compute-heavy AI models. Solar and wind can’t guarantee 24/7 uptime with today’s storage tech.
But what can? Natural gas.
LNG exports add another twist. U.S. LNG shipments create steady demand for North American gas, no matter what’s happening with domestic weather. Combine the AI-driven load with LNG export commitments, and you get a bit of a floor on natural gas demand that has arguably never existed before.
These Aren’t Your Energy Companies From 10 Years Ago
Energy companies have changed how they handle cash. In my opinion, they had to, or else the market would have punished them substantially.
Energy companies used to chase volume at any cost. Management teams got paid to drill more wells, add more barrels, and grow production year over year. That playbook broke after the 2014 crash and never really came back.
That era is dead. Living in Alberta, I know that era is dead.
Most integrated and upstream producers now cap reinvestment at about 35% of operating cash flow. The rest flows back to shareholders through dividends, buybacks, and debt reduction.
Debt-to-EBITDA ratios across the sector have compressed below 1.5x in many cases, down from 3x or higher during the last upcycle, where many producers got wrecked on falling prices.
Some producers are delivering total shareholder yields above 8%, which is substantially higher than the S&P 500 or the TSX.
Another prudent decision for many producers is to link distributions to cash flow or commodity prices rather than a fixed payout. When oil rallies, the dividend rises. When it goes down, the payout adjusts. Look no further than Tourmaline Oil, which pays a small base dividend and then bonuses depending on cash flows.
Frameworks like this are now standard across the sector. I’d argue that if you are a producer without this type of framework, the market doesn’t like you very much.
Ultimately, this is good for investors. Yes, it likely does cap production growth for these producers, but in this wild of a sector, money in your hand via buybacks and dividends is what you want to see.
So, Now That We Know The Bullish Side, What Funds Should You Own?
I’ll go over some ETFs that offer varying levels of exposure and meet different needs for individual investors.
Total Return Focus: Ninepoint Energy Fund (NNRG)
For a total return play, passive indexing is often the enemy in the energy sector. Why?
Traditional index-based ETFs like XEG are heavily weighted toward “the big two” (CNRL and Suncor). Sometimes, this is good. However, if you’re really looking to capture the maximum total return, you need to focus on smaller producers.
NNRG, managed by Eric Nuttall, is a solid choice here. Unlike a capped index, NNRG is an actively managed fund by some of the smartest people in the space. This fund doesn’t just hold stocks; it hunts for companies with aggressive share buyback programs and strong balance sheets.
While the management fee is higher than that of a passive fund, the alpha comes from capturing the valuation rerating of mid-tier producers that the big institutional indices often ignore. Case in point: NNRG has delivered returns 7%~ higher annually over the last half-decade than something like XEG.
It is volatile and probably the highest-risk option on this list, but if you believe the 2026 outlook for sustained $60-$80 oil, this is likely the fund that could deliver the best returns.
Income Focus: Global X Cdn Oil & Gas Equity Covered Call ETF (ENCC)
Income in the energy sector used to mean just collecting the 3-4% yield from the producers. In 2026, the sophisticated way to play this is through what they call “volatility harvesting.” Energy is naturally one of the most volatile sectors on the TSX, and ENCC turns that price swinging into a monthly paycheck.
ENCC holds a basket of large-cap Canadian energy producers and writes (sells) covered call options on them. This effectively converts the choppiness of the oil market into a cash premium.
I am not a fan of covered call ETFs. Let’s make that clear. However, in highly volatile and cyclical sectors, they can make sense. Energy is one of them, in my opinion.
In a year like 2026, where we face a muted price outlook but high geopolitical tension, energy prices often move sideways. A traditional ETF would stay flat, but ENCC generates double-digit yields (often 12%+) by selling the right to buy its shares at higher prices.
You sacrifice the moonshot potential if oil suddenly spikes to $120, but you also collect a premium from the holdings in the form of income.
Global Perspective: iShares Global Energy ETF (IXC)
If you only own Canadian energy, you are essentially making a pure-play bet on the Western Canadian Sedimentary Basin. Our producers are the best on the planet, in my opinion, but a truly diversified portfolio needs a global view. While IXC is a U.S. ticker, it is the most efficient way for Canadians to get exposure to the global energy industry.
IXC gives you the heavyweights. ExxonMobil, Chevron, Shell, and TotalEnergies. Why does this matter, especially in 2026? Because they are leading the charge in Carbon Capture and Storage (CCS) and hydrogen technologies, which are becoming commercially viable this year.
While Canadian stocks give you the best “torque” to oil prices, these global giants give you exposure to European and Asian energy markets that behave very differently from North America.
I would combine this with a Canadian ETF to provide the best exposure.
Infrastructure & Pipelines: Global X Equal Weight Cdn Oil & Gas (NRGY)
Most investors think of pipelines (midstream) as a separate, “boring” category. However, in 2026, pipelines are very interesting. With the TMX pipeline now at full capacity and new LNG export facilities coming online, the decade-long bottleneck plaguing Canada is gone.
NRGY is unique because its equal-weight strategy naturally gives infrastructure giants like Enbridge, TC Energy, and Pembina a much larger slice of the pie than a standard market-cap ETF would. The pipelines are the “toll booth.”
They don’t care as much if oil is $60 or $90, they just care that the pipes are full. In 2026, these companies are also pivoting to serve the massive power needs of AI data centers. NRGY captures the transition of pipeline companies into broader energy infrastructure plays.
It provides a smoother ride than the producers. However, it is likely also to provide lower upside. Consistent income, lower volatility, but likely lower upside. Whether you own this or Ninepoint largely depends on your overall investment goals.
Things That Could Delay (Not Derail) The Thesis
While the case for energy is the strongest it’s been in decades, we have to respect the Black Swan risks. By Black Swan, I mean completely unpredictable events.
These aren’t necessarily death blows to the sector, but they could certainly shift the timeline for a bullish energy case.
The first is the CUSMA wildcard. July 1st marks the review of our North American trade agreement. If we see a scenario involving 10% tariffs on Canadian energy exports, it’s going to create a temporary haircut for free cash flow.
Another issue is that the current floor for the industry is built on supply discipline. This is the difficulty with oil. OPEC can simply choose to ramp up production, increase supply, and kill pricing.
And finally, especially with the recent GDP print in Canada signaling a potential recession, if a global recession hits harder than expected, oil could dip in price. Even if producers don’t flood the market, a significant drop in global consumption could keep prices sideways for longer than the scarcity thesis I’ve explained suggests.
Wrapping it up, in 2026, balance sheet strength is your best friend. The ETFs I’ve highlighted are a play on major/mid-tier producers and pipelines that are disciplined. They may face volatility, but they’ve shown they’ve been able to navigate it.
