It’s no secret that the energy sector has not been having the best year. Oil prices have declined dramatically in the last 12 months. Yes, it might be devastating for energy companies, but it’s also an opportunity for investors.
Trading oil futures or buying oil company stocks are good ways to leverage an oil price recovery. However, each of these presents a big risk for your capital if oil prices fluctuate downwards. Want to make the most of this opportunity without taking on undue risk?
The right exchange-traded funds (ETFs) are the way to go.
I will discuss some of the best Canadian Oil ETFs trading on the TSX that you can consider adding to your portfolio.
What Are Canadian Oil ETFs?
ETFs are a better way for Canadians to invest in a basket of assets trading on the stock market rather than picking up individual stocks. Trading oil futures can allow you to bet on the commodity itself.
However, it is a complicated task that can require a certain level of expertise. You should be a more advanced trader to understand the complexities of trading oil futures.
Investing in oil-producing companies can be a great alternative. Most oil companies are leveraged to oil prices. Rising oil prices means that the valuation of the companies will rise fast. Unfortunately, the company’s share prices can also rapidly devalue if oil prices drop.
There are ETFs that hold a diverse portfolio of oil futures that allow you to take advantage of futures contracts without worrying about the complexities that come with it.
Similarly, there are ETFs that are invested in groups of oil companies. You don’t have to deal with analyzing individual stocks so you can appropriately spread your risk around in a diverse basket of stocks. An ETF does that for you.
The 7 Best Canadian Oil ETFs
Whether you want to take advantage of oil futures contracts or you want shares in oil companies, there are several ETFs that you can consider.
I have divided the seven best Canadian oil ETFs based on those that hold oil futures and those that invest in oil producers.
If you want to leverage the oil price recovery in the coming months, these ETFs can provide you the safest opportunities to achieve your investment goals.
The list could have been more populated if the global situation was better. There were a few Canadian oil ETFs that I would have loved to have here a few years ago. Unfortunately, the hardships faced by the industry eliminated many would-be candidates.
ETFs investing in Oil Futures
Here are the ETFs that hold oil futures contracts. Investing in these can provide you with an easier way to invest in the commodity itself.
1. Horizons Crude Oil ETF
Dividend Yield: –
Assets Under Management: $44.55 million
Horizons Crude Oil ETF is an energy sector ETF investing indirectly in Solactive Light Sweet Crude Oil Winter MD Rolling Futures Index ER through forward agreements from Canadian financial institutions. The ETF seeks to provide its investors with exposure to the performance of the index if they are bullish on oil.
HUC seeks to provide its investors with safer exposure to the commodity prices through the winter months contract of each year, typically the most liquid throughout the year. It can eliminate the monthly futures contract roll that could lead to a negative roll yield. The ETF invests only in the December contract and executes its underlying exposure roll once per year in June.
2. Horizons BetaPro Crude Oil Leveraged Daily Bull ETF
Dividend Yield: –
Assets Under Management: $114.86 million
Horizons BetaPro Crude Oil Leveraged Daily Bull ETF is an ETF that seeks daily investment results with the aim of corresponding to up to twice the daily performance of the Horizons Crude Oil Rolling Futures Index. If you are an investor seeking a slightly riskier ETF that can provide you greater returns on a short-term basis, HOU could be worthwhile to consider.
The Horizons Crude Oil Rolling Futures Index that it follows is owned and operated by the Manager seeking to provide exposure to as close to the forward month contract as possible. Since this is an ETF rebalanced daily, it would not make an ideal long-term investment, even if oil prices rise.
ETFs investing in Oil Stocks
Here are the ETFs that invest in a basket of oil stocks. Investing in these could provide you with a better way to reduce risk through diversification and save you the time of analyzing individual stocks and manually rebalancing your portfolio.
Dividend Yield: 1.50%
Assets Under Management: $1.4 billion
BlackRock is a big name in the ETF world. The BlackRock iShares S&P/TSX Capped Energy Index ETF makes its way to my list of the best Canadian oil ETFs for ETFs that invest in energy stocks. The ETF tracks the S&P Energy Index composed of stocks from each industry.
The BlackRock iShares S&P/TSX Capped Energy Index ETF seeks to provide its investors with long-term capital growth. It aims to replicate, to the extent possible, the performance of the S&P/TSX Capped Energy Index net of expenses. Typically, the ETF invests in equity securities issued by Canadian issuers in the Canadian energy sector.
Top Canadian energy stocks like Canadian Natural Resources and Suncor Energy make up 50% of its entire holdings, drastically reducing the element of diversity. If you are seeking a broadly diversified Canadian energy sector ETF, it may not be ideal for that purpose.
4.BMO S&P/TSX Equal Weight Oil & Gas ETF
Dividend Yield: 3.47%
Assets Under Management: $196.5 million
BMO S&P/TSX Equal Weight Oil & Gas Index ETF is an ETF issued by the Bank of Montreal. This ETF has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight Canada Oil & Gas Index, net of expenses. The underlying index that the ETF seeks to replicate includes securities in the oil & gas sector in Canada.
The oil and gas industry has several segments, including drilling, equipment and services, integrated, exploration and production, refining and marketing, and storage and transportation.
If you are an investor seeking a broader diversification throughout the sector, ZEO can be an ideal investment to consider. It seeks to replicate the performance of an equal weight Canadian large market capitalization oil and gas companies index.
While it invests solely in fixed-income securities, ZEO provides its investors with a decent diversification across various segments of the Canadian energy sector.
5.BMO Junior Oil Index ETF
Ticker: TSX:ZJO (Delisted and no longer available)
Dividend Yield: (Delisted and no longer available)
Assets Under Management: (Delisted and no longer available)
MER: (Delisted and no longer available)
Note that ZJO is now delisted and no longer available. I wanted to include this on my list though, to highlight the downsides of investing in a thinly traded ETF in a niche sector.
Another one of the best Canadian oil ETFs issued by the Bank of Montreal is the BMO Junior Oil Index ETF. The ETF has been designed with the intent to replicate, to the extent possible, the performance of the Dow Jones North America Select Junior Oil Index, net of expenses. The ETF invests in the shares of oil companies that achieve more than 50% of revenues through oil-related activities.
If you are an investor seeking outsized returns, the BMO Junior Oil Index ETF could be an ideal investment to consider. It is another high-risk and high-reward play. It does remarkably well whenever oil prices rise. It has exposure to both Canadian and US equities in the energy sector, but US equities comprise most of the ETF’s holdings.
Some of its top holdings include Parsley Energy, Gibson Energy, and Vermilion Energy. It has a highly diversified portfolio that relies largely on oil prices for ups and downs.
6.Horizons S&P/TSX Capped Energy Index ETF
Dividend Yield: –
Assets Under Management: $57.36 million
Horizons S&P/TSX Capped Energy Index ETF seeks to replicate, to the extent possible, the performance of the S&P/TSX Capped Energy Index (Total Return), net of expenses. Unlike other ETFs, HXE does not physically hold the underlying constituent securities of the index.
Instead, its return is delivered through swap agreements with acceptable counterparties, i.e., Canadian banks with a minimum A credit rating.
HXE is a corporate class ETF. Investors are not expected to receive any taxable distributions directly. They are only expected to receive the total return of the underlying S&P/TSX Capped Energy Index instead.
This makes the ETF relatively more advantageous for investors. Holding this ETF in a taxable account can allow you to defer incurring a tax liability until you sell the ETF due to its structure.
7.Horizons BetaPro S&P/TSX Capped Energy 2X Daily Bull ETF
Dividend Yield: –
Assets Under Management: $50.44 million
By the entries on my list of the best Canadian oil ETFs, it might seem like I favor Horizons. However, several entries on the list from one issuer should only suggest that it could be a better provider for investors to consider right now. The Horizons BetaPro S&P/TSX Capped Energy 2X Daily Bull ETF proves my point.
HEU seeks daily investment results that endeavor to correspond to two times the daily performance of the S&P/TSX Capped Energy Index. The ETF does not seek to achieve its investment objective over a period of more than one day.
It is an ETF with higher volatility with a high-risk and high-return inclination. Almost 70% of its invested capital is held as cash for collateral. It uses 30% for forward agreements.
Since this is an ETF that is rebalanced daily, it would not make an ideal long-term investment, even if oil prices rise.
How to Buy the Best Canadian Oil ETFs in Canada
The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:
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To learn more, check out my full breakdown of the best trading platforms in Canada here.
Canadian oil ETFs can provide you with a more convenient way to invest in the commodity. However, being well-informed can help you make the best possible decision based on your preferences.
Each of the best Canadian oil ETFs I’ve listed makes an ideal pick for different investors, based on what they specifically want. I personally prefer safer exposure and think that the BMO S&P/TSX Equal Weight Oil & Gas Index ETF is more up my alley.
However, preferences can vary a lot, depending on what your investment goals are. For related reading, check out the best energy ETFs in Canada.