5 Best TSX Energy Index ETFs for April 2024

If you are looking to invest in Canadian energy companies but don’t know where to start, a Canadian energy index ETF is a good option to consider.

Canadian profits and margins in the oil and gas sector have increased faster than any other sector in the economy.

Investing in a Canadian energy index ETF saves you from having to pick individual Canadian energy companies to invest in.

We will cover the best TSX energy index ETFs below and go over some key features.

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Pros and Cons of TSX Energy Index ETFs

While investing in Canadian energy index ETFs allow you to get concentrated exposure to the energy sector, doing so comes with its pros and cons.

Pros

Generally good performance when inflation is high
Energy is an essential commodity for everyone around the world
Energy companies (and therefore energy index ETFs) trade at inexpensive multiples and offer attractive dividend yields

Cons

Long-term energy sector performance is relatively low
Traditional oil and gas is facing serious long-term headwinds from renewable energy
Energy companies are starting to become excluded from a large number of ESG funds and strategies

While energy as a concentrated investment may not be your best choice for the long term, it can perform very well in the short term, especially if commodity prices are rising due to inflation.

5 Best TSX Energy Index ETFs

1. Horizons S&P/TSX Capped Energy Index ETF

Ticker: HXE.TO
Inception Date: September 16, 2013
Assets under Management: $107.16 Million
Management Expense Ratio: 0.27%
Management Style: Passive
Risk Rating: High
Distributions: None
Yield: 0%
Stock Price: $30.58
YTD Return: 0.72%

Horizons offers an excellent Canadian energy ETF through HXE, which invests in the broad Canadian energy sector. The ETF contains companies involved with the various energy sector processes: extraction, storage, and transportation.

HXE follows the S&P/TSX Capped Energy Index (Total Return), which is a market-cap-weighted basket of stocks. Companies with larger market capitalizations are given a higher allocation across both the ETF and the index.

The ETF uses a total return swap approach which eliminates distributions in order to increase the fund’s tax efficiency. The swap mirrors the return of the index that HXE follows without having to hold the basket of stocks. This ETF structure is very valuable within non-registered accounts.

HXE comes with a long performance track record and is a fairly large ETF in terms of assets. Since the ETF does not pay distributions, it will not be very appealing for dividend-focused investors.

Like most energy-themed funds, HXE is rated as high-risk by Horizons. The ETF invests solely in Canadian energy stocks, ignoring the energy sector in the US as well as in other countries around the world.

If you are not concerned with income from your Canadian energy ETF, HXE is a top choice to consider adding to your portfolio.

2. iShares S&P/TSX Capped Energy ETF

Ticker: XEG.TO
Inception Date: March 19, 2001
Assets under Management: $2.2 Billion
Management Expense Ratio: 0.60%
Management Style: Passive
Risk Rating: High
Distributions: Quarterly
Yield: 5.83%
Stock Price: $15.19
YTD Return: 0.68%

iShares’ XEG ETF is by far the largest passive Canadian energy-focused ETF. Like HXE, XEG also invests in Canadian energy companies across various stages of the energy cycle.

The ETF is passively managed and aims to track the return of the S&P/TSX Capped Energy Index. The ETF’s index is once again weighted by market cap, meaning that larger companies will have a higher weight.

XEG has a long performance track record and is a very large fund in terms of assets. The ETF is many times larger in terms of AUM than the next largest Canadian energy ETF.

XEG pays quarterly distributions and offers investors a fantastic distribution yield. The ETF is substantially more expensive than HXE when considering its MER but is similar to other peers on our list.

Since the ETF focuses on the energy sector, XEG is rated by iShares as a high-risk fund.

If you are looking for a Canadian energy index ETF with a very high distribution yield, XEG is a great option to consider.

3. BMO Equal Weight Oil & Gas Index ETF

Ticker: ZEO.TO
Inception Date: October 20, 2009
Assets under Management: $274.93 Million
Management Expense Ratio: 0.61%
Management Style: Passive
Risk Rating: High
Distributions: Quarterly
Yield: 3.83%
Stock Price: $61.83
YTD Return: 1.46%

Another TSX energy index to consider is the ZEO fund from BMO. The ETF invests in a lot of the same underlying equities as XEG and HXE but with an equal-weighted approach. This causes ZEO to have very different weights across its portfolio relative to its market-weighted peers.

ZEO aims to replicate the performance of the Solactive Equal Weight Canada Oil & Gas Index. The ETF is the second largest Canadian energy index ETF on our list by assets under management and comes with a long performance track record.

The ETF offers investors a good dividend yield, with distributions being paid out quarterly. This makes ZEO a more attractive option than HXE for investors that are looking for income from dividends.

BMO has assigned a high-risk rating to ZEO, given its focus on energy as a sector. ZEO has a similar MER to XEG, both being considerably higher than HXE’s MER.

If you are looking to invest in various Canadian energy companies on an equal basis, ZEO is a good ETF to consider.

4. Horizons Pipelines & Energy Services Index ETF

Ticker: HOG.TO
Inception Date: July 14, 2014
Assets under Management: $18.42 Million
Management Expense Ratio: 0.65%
Management Style: Passive
Risk Rating: High
Distributions: Quarterly
Yield: 4.09%
Stock Price: $10.35
YTD Return: 3.55%

Horizons offers a pipelines and energy services ETF which targets a historically less volatile subsector within the energy space. HOG strictly invests in energy sector companies that operate in the midstream space. The operations of these companies involve:

Transportation
Storage
Wholesale Marketing

HOG follows the Solactive Pipelines & Energy Services Index and avoids investing in oil and gas extraction companies. The ETF is not a total-return ETF, meaning that the fund actually holds the underlying stocks and pays distributions to investors.

The HOG ETF has a long performance track record but is very small in terms of assets under management. Given the small size of the fund, it is at risk of closing down in the future for profitability reasons if it fails to attract additional capital.

Although Horizons markets HOG as a less volatile ETF, the fund is still classified as a high-risk investment. HOG has a similar MER to ZEO and XEG.

If you are looking to invest more specifically within the Canadian energy sector, the HOG ETF is a decent choice to consider.

5. Horizons Canadian Oil and Gas Equity Covered Call ETF

Ticker: ENCC.TO
Inception Date: April 11, 2011
Assets under Management: $60.9 Million
Management Expense Ratio: 0.84%
Management Style: Active (Covered Calls)
Risk Rating: High
Distributions: Monthly
Yield: 13.66%
Stock Price: $10.31

A final Canadian energy ETF to consider investing in is ENCC, also offered by Horizons. ENCC is a very attractive option for investors that are looking for a high-income stream from their investments. The ETF invests in the Canadian energy sector while also adding a covered call strategy to boost the fund’s yield.

The ETF tracks the Solactive Equal Weight Canada Oil & Gas Index. The fund’s covered call strategy is actively managed by the ETF’s portfolio management team.

The fund’s covered call strategy helps to reduce volatility over time slightly. ENCC is fairly small in terms of AUM but has a long track record.

Although the fund comes with a high-risk rating, the strategy should have relatively less volatility due to its covered call strategy.

ENCC’s MER is the highest on our list and significantly higher than that of HXE. The ETF currently offers an incredible yield of over 15% to investors, with distribution being paid out on a monthly basis.

If you want to invest in the Canadian energy sector and also add a very high-yielding fund to your portfolio, ENCC is a great option.

Are TSX Energy Index ETFs Worth the Fees?

If you are bullish on the energy sector as a whole, TSX energy index ETFs are a great way to add Canadian exposure to your portfolio. The ability to access a diversified basket of Canadian energy companies at fairly inexpensive fees is generally a good trade-off.

The diversity of Canadian ETF options will appeal to both investors that are looking for a high-yielding Canadian energy ETF as well as to those that do not want distributions at all (for a higher investment tax efficiency).

Keep in mind that Canadian energy companies are generally highly correlated, meaning that they generally move in the same direction over time. They are usually very sensitive to changes in energy prices (oil, natural gas, etc.).