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Getting Exposure to the Canadian Energy Industry

With oil prices falling to 52 week lows,  energy company stock prices are following suit with their own aggressive decline.  These low prices are bound to attract value investors like a number of readers that have recently contacted me. The main theme of the questions are: “how do I obtain exposure to the Canadian energy sector?”

One thing to clarify, any investor who has exposure to the Canadian stock market index has exposure to the Canadian energy sector. Approximately 25% of the TSX index are energy companies.  But what if you want  concentrated energy exposure?  There are a number of ways to get exposure to the energy index, they range from easy to a little more involved.

Energy Sector Investment Options

1. Energy Mutual Funds. The easiest method perhaps it to call up your favorite bank and ask them for a mutual fund that invests in the energy sector.  However, sometimes the easiest choice isn’t the best long term solution.  Studies have shown time and time again that mutual funds perform poorly over the long term.  In other words, most funds charge high fees to under-perform the index.  As you can see, I’m not a fan of the mutual fund option.  Avoid if you can.

2. Energy Sector Index ETFs. For investors who are willing to take matters into their own hands with do-it-yourself (DIY) investing with a discount brokerage (my comparison of brokers), ETFs are an easy and cost efficient way to get exposure to a particular sector.  Here are some ETFs that cover the Canadian energy index.

  • XEG - The iShares S&P/TSX Capped Energy Index ETF is perhaps the most popular with the highest liquidity. Out of their 58 holdings,  their top five are Suncor, Canadian Natural Resources, Cenovus Energy, Encana and Crescent Point Energy.  Although the most popular energy ETF, it’s also the most expensive with a MER of 0.60%.
  • ZEO - The BMO S&P/TSX Equal Weight Oil and Gas ETF has the second highest volume of traded shares.  This one is more concentrated with only 16 holdings.  The top 5 holdings are TransCanada Corp, Pembina Pipeline, Enbridge Inc, Imperial Oil, and Encana Corporation.  This one also has a hefty price tag of 0.55%.
  • HXE - Horizons S&P/TSX Capped Energy Index ETF has the lowest volume of the bunch, but also the cheapest with a MER of 0.35%.  It follows the same index as XEG with the same holdings, but with a much lower annual fee.

3. Buying Individual Companies.  This third option of buying individual stocks is for the investor who is willing to take on a little more risk and has more time to manage their portfolio.  As a dividend investor, I typically buy companies that have a reasonable payout ratio,  a long dividend history, and a corporate mandate of increasing their dividend when possible.  A number of companies in the energy index fit the bill such as Suncor, Canadian Natural Resources, TransCanada Corp, Enbridge, Imperial Oil and Ensign Energy.  Here is an article explaining when to buy dividend stocks.

Those are some of my ideas on getting exposure to the Canadian energy sector.  What are your thoughts?  Have you been buying during this energy correction?

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