The rising cost of crude oil amid the economic expansion has seen a growing interest in the energy sector among Canadian investors.
Despite the rising interest, many Canadian investors are unsure about individual stocks trading in the energy sector. Exchange-Traded Funds (ETFs) offer you access to a basket of securities managed by investment firms to track various segments of the stock market.
If you are interested in investing in the Canadian energy sector but want to diversify your capital across a group of energy companies to reduce your risk, the best energy ETF in Canada could be ideal for you.
This post will discuss the top energy ETFs in Canada that can provide you with exposure to the industry while diversifying your capital to mitigate capital risk.
Both ETFs and mutual funds can provide you with diversified exposure to a basket of securities trading on the stock market. However, there are several reasons why ETFs have become more popular than mutual fund products over the years.
Significantly lower fees are one of the most important reasons ETFs are a much better alternative to mutual funds.
ETFs are a much better way to diversify into an industry if you are unsure about picking individual stocks for your portfolio. Check out my video below to understand why I think mutual funds might not be ideal for you.
Despite the recent challenges faced by the global energy industry, the sector has provided substantial long-term returns for investors through capital gains and dividends.
While picking out individual stocks can help you get market-beating returns, investing in the wrong company could result in significant losses.
Investing in an energy ETF might not eliminate capital risk. Still, it can spread your capital across different companies to mitigate your losses if one company underperforms while the rest post strong performances on the stock market.
The Best Energy ETFs in Canada
This section of my guide to the best energy ETF in Canada will list down some of the top funds you can consider investing in to gain exposure to the energy industry. I have divided the list into different categories based on the kind of exposure the ETFs can offer you to the energy sector.
Best Energy ETFs That Invest In Oil Stocks
I will begin the list by discussing the best ETFs to gain exposure to Canadian energy sector companies. These fund managers for these ETFs focus on allocating the assets entirely to equity securities trading in the energy sector.
Here are some key facts about BlackRock iShares S&P/TSX Capped Energy Index ETF:
- Ticker: TSX:XEG
- Inception date: March 19, 2001
- Assets Under Management (AUM): $1.33 billion (as of September 22, 2021)
- Management fee: 0.55%
BlackRock iShares S&P/TSX Capped Energy Index ETF is an ideal asset to consider if you want to invest in Canadian energy companies. It is easily one of the best energy ETFs in Canada because it is one of the most substantial funds.
The ETF tracks the S&P/TSX Capped Energy Index to the extent possible net of expenses to provide investors with long-term capital growth.
BlackRock XEG allocates 100% of its resources to 14 Canadian equity securities trading in the energy sector. You can use the fund to express a sector view due to its narrow focus on the energy sector.
However, you should know that it is a high-risk investment because it does not invest in fixed-income assets or diversify into other industries. It is also a pricey ETF because it comes with a Management Expense Ratio (MER) of 0.61%.
2. BMO S&P/TSX Equal Weight Oil & Gas ETF (ZEO)
Here are some key facts about BMO S&P/TSX Equal Weight Oil & Gas ETF:
- Ticker: TSX:ZEO
- Inception date: October 20, 2009
- Assets Under Management (AUM): $144.52 million (as of September 22, 2021)
- Management fee: 0.55%
BMO S&P/TSX Equal Weight Oil & Gas ETF is a fund issued and managed by BMO Global Asset Management. The fund has been designed to emulate the performance of the Solactive Equal Weight Canada Oil & Gas Index to the extent possible and net of expenses.
The underlying index comprises securities operating in the oil and gas sector in Canada.
The energy sector has several segments, and BMO ZEO could be an ideal way to get broadly diversified exposure throughout the industry. BMO ZEO is a high-risk ETF because it offers no exposure to fixed-income assets or geographical diversification. The fund comes with an MER of 0.61%.
3. Horizons S&P/TSX Capped Energy Index ETF (HXE)
Here are some key facts about Horizons S&P/TSX Capped Energy Index ETF:
- Ticker: TSX:HXE
- Inception date: September 16, 2013
- Assets Under Management (AUM): $49.65 million (as of September 21, 2021)
- Management fee: 0.25%
Horizons S&P/TSX Capped Energy Index ETF makes it to the list of the best energy ETFs in Canada for many reasons, but its management fee and MER is a significant factor. The fund comes with a management fee of 0.25% and an MER of 0.27%, making it far less costly than many others on this list.
The fund seeks to track the S&P/TSX Capped Energy Index (Total Return), to the extent possible, and net of expenses. The relative weight of any single index constituent security is capped.
Unlike other ETFs, Horizons HXE does not physically hold underlying constituent securities of the index, and it provides total returns without direct taxable distributions.
Best Energy ETFs That Invest In Oil Futures
These ETFs provide you with exposure to the performance of the energy sector by investing in oil futures instead of the commodity itself, providing you with relative safety against commodity price volatility.
4. Horizons Crude Oil ETF (HUC)
Here are some key facts about Horizons Crude Oil ETF:
- Ticker: TSX:HUC
- Inception date: June 24, 2009
- Assets Under Management (AUM): $25.10 million (as of September 21, 2021)
- Management fee: 0.75%
Horizons Crude Oil ETF is an energy ETF that seeks to track the performance of the Solactive Light Sweet Crude Oil Winter MD Rolling Futures Index ER. The fund does not invest in equity securities trading in the energy sector. Instead, it focuses on investing in oil futures agreements from Canadian financial institutions.
The fund seeks to provide you with safer exposure to commodity prices through winter months contracts each year since it is traditionally the most liquid at that time. Horizons HUC is a costly ETF with an MER of 0.88%.
5. Horizons BetaPro Crude Oil Leveraged Daily Bull ETF (HOU)
Here are some key facts about Horizons BetaPro Crude Oil Leveraged Daily Bull ETF:
- Ticker: TSX:HOU
- Inception date: January 15, 2008
- Assets Under Management (AUM): $97.37 million (as of September 21, 2021)
- Management fee: 1.15%
Horizons BetaPro Crude Oil Leveraged Daily Bull ETF is another energy ETF that does not invest directly in equity securities trading in the energy sector in Canada. Instead, the fund provides you with daily investment results to provide you with up to twice the daily performance of the Horizons Crude Oil Rolling Futures Index.
Horizons HOU is not an ideal investment for long-term investors because it focuses on providing you returns on the daily performance of the underlying index.
Since it uses leverage, the higher reward comes with greater capital risk than other ETFs. Unsurprisingly, the fund is also more expensive and comes with an MER of 1.29%
Best Energy ETFs That Invest In Clean Energy
Many investors have made massive fortunes over the years by investing in oil and gas companies and watching their funds grow through capital gains and dividends. However, increasing concerns regarding climate change have shifted global focus towards cleaner alternatives to fossil fuels.
With the impending renewable and clean energy boom on the horizon, investing in clean energy may prove to be an ideal way for you to enjoy stellar long-term returns on your investment. Fortunately, there are clean energy ETFs that have started trading on the Canadian stock market.
This section of my guide to the best energy ETFs in Canada will discuss the most prominent renewable energy ETFs in Canada right now.
6. Harvest Clean Energy ETF (HCLN)
Here are some key facts about Harvest Clean Energy ETF:
- Ticker: TSX:HCLN
- Inception date: January 7, 2021
- Assets Under Management (AUM): $69.1 million (as of August 31, 2021)
- Management fee: 0.40%
Harvest Clean Energy ETF is one of the latest ETFs to launch on the stock market. The fund is also the first renewable energy ETF to begin trading in Canadian stock markets.
The fund seeks to provide investors with returns by tracking the performance of the 40 largest Clean Energy Issuers selected by the fund manager from the Clean Energy Investable Universe.
The fund diversifies its assets into equity securities in the renewable energy sector worldwide. The portfolio’s holdings are weighted based on market capitalization, and the fund manager rebalances the portfolio twice each year. With an MER of 0.68%, it is a slightly pricey ETF to own.
7. BMO Clean Energy Index ETF (ZCLN)
Here are some key facts about BMO Clean Energy Index ETF:
- Ticker: TSX:ZCLN
- Inception date: January 20, 2021
- Assets Under Management (AUM): $70.08 million (as of September 22, 2021)
- Management fee: 0.35%
BMO Clean Energy Index ETF is BMO Global Asset Management’s first renewable energy ETF. The fund is designed to replicate the performance of the S&P Global Clean Energy Index to the extent possible and net of expenses.
The fund is relatively new, launching on January 20, 2021, and was designed to capitalize on the growing renewable energy trend.
BMO ZCLN invests in and holds the constituent securities of the S&P Global Clean Energy Index in the same proportion as the underlying index.
BMO ZCLN offers you geographically diversified exposure to renewable energy companies, and it allocates its assets to various subsegments in the renewable energy industry.
With an MER of 0.40%, it is the lowest-cost method of getting international exposure to the renewable energy industry.
What Is The Best Clean Energy ETF For 2021?
Investors recognize the clear shift towards clean energy, and stocks trading in the renewable energy industry have benefitted from the developing trend. However, we are early into the energy sector shift, and it might be too early to determine which individual company might be the best long-term investment.
There are only two renewable energy ETFs listed on the TSX at writing. Both Harvest HCLN and BMO ZCLN began trading on the TSX in early 2021. Picking out the best ETF comes with the prerequisite that the fund manager is a major financial institution or investment firm, and the fund boasts a significant AUM.
You cannot go wrong with picking BMO ZCLN or Harvest HCLN. Both funds boast AUMs over $50 million, and BMO Global Asset Management and Harvest Portfolios are reputable fund managers.
If lower fees are a major consideration for you, BMO ZCLN is the clear winner with an MER of 0.40% compared to Harvest HCLN’s MER at 0.68%.
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The Canadian energy ETFs offer you a more convenient method to invest in the commodity. Whether you are an investor who is unsure about picking individual stocks or simply want to diversify your capital across a basket of energy sector stocks, the best energy ETFs in Canada could suit your investment goals.
I have listed different types of ETFs to help you find ideal picks based on your preferences, whether you want to invest in oil futures, oil-producing companies, or explore the relatively untapped potential of the renewable energy industry.
Check out my list of the best Canadian renewable energy stocks if you want to invest in the renewable energy sector and explore the top individual stocks in the industry right now.