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Investing in Canada’s Energy Sector

Canadian energy stocks have been on a tear this year and it is easy to see why.  Canada’s energy resources are long-lived assets, while the “fracking” techniques that have captured all the publicity in the past few years mostly produce short-lived wells.

You may be surprised to learn that anyone with a Canadian index fund already holds a significant position in the Canadian energy sector because it makes up 26% of the index.  If you’re interested in more exposure to the energy sector here are a few ideas.

BMO S&P/TSX Equal Weight Oil & Gas Index ETF (ZEO) 

MER: 0.55%

Yield: 2.87%

This exchange-traded fund (ETF) holds the underlying securities in the same proportion of the energy index.  Suncor (SU), EnCana (ECA), Canadian Natural Resources (CNQ), Enbridge (ENB) and Imperial Oil (IMO) are among the top 10 holdings of this ETF.  The higher yield is a reflection of the ETF’s investment style (ie. Equal Weighting) whereby pipeline companies such as Enbridge (ENB) and TransCanada (TRP) that offer a bit higher yield are represented in greater proportion than in the Market Cap approach discussed below.

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

MER: 0.60%

Yield: 1.85%

The XEG tracks the energy index based on market capitalization so it should come as no surprise that 3 companies – Suncor (SU), Canadian Natural Resources (CNQ) and Cenovus (CVE) – make up 40% of the fund.

How to weigh the benefits of Equal Weight versus Capped Index

  1. Equal Weight is active, while capped is more passive.
  2. Equal Weight is more diversified, while capped is more concentrated in the large cap energy companies
  3. Volatility.  The energy sector as a whole is quite volatile.  Equal weight is more volatile on a short-term basis because it has more small cap stocks which are more volatile than large caps.

Performance

Here are the performance metrics of the two ETFs as of August 2014

ZEO

52-week range: $14.24-$17.82

1-year returns: 22.90%

XEG

52-week range: $16.13-$21.50

1-year returns: 27.82%

Disclosure: I hold shares in Suncor (SU) and am long the company