Investing in a portfolio of stocks that expresses a sector view while aligning with your financial goals is not a simple task. It involves conducting significant research about the companies for each stock and understanding how industry changes can affect your returns. It requires a lot of hard work, research, time, and expert knowledge of the industry and financial markets.
If you are seeking exposure to Canadian energy companies in the hopes of taking advantage of resurging oil and gas demand, an exchange-traded fund (ETF) like BlackRock iShares S&P/TSX Capped Energy Index ETF might be suitable for you.
In my iShares XEG review, I will discuss what you need to know about the all-equity ETF to help you determine whether it is an ideal investment.
All-Equity Exchange-Traded Fund
- Is a low-cost ETF
- Offers targeted exposure to companies in Canada’s energy sector
- Can be used to express a sector view
- Invests entirely in equity securities
- Lacks sector diversity
- Lacks geographic diversity
- Is highly prone to volatility in commodity prices
What Is BlackRock iShares S&P/TSX Capped Energy Index ETF?
BlackRock iShares S&P/TSX Capped Energy Index ETF is an exchange-traded fund designed to provide its investors with long-term capital growth by recreating the performance of the S&P/TSX Capped Energy Index, net of expenses.
BlackRock iShares XEG is an all-equity ETF. Hence, it invests its entire capital in a basket of equity securities without exposure to fixed-income securities like bonds or GICs. Launched on March 19, 2001, it offers two decades of past performance that you can refer to if you want to determine its potential returns.
The index follows the publicly-traded Canadian companies’ performance in the Toronto Stock Exchange’s (TSX) massive oil and gas industry. Professionally managed by BlackRock, a multinational investment management corporation, iShares XEG ETF is a high-risk investment opportunity.
There are several other all-equity ETFs in Canada that you can check out in my list of the best Canadian ETFs here.
What Does BlackRock iShares XEG ETF Invest In?
iShares XEG is among the oldest ETFs trading in Canada that allocates its funds to the Canadian energy sector without diversifying into any other industries. Hence, unlike most other ETFs trading on the TSX, it offers zero diversification.
As an all-equity ETF that invests all of its funds in stocks without exposure to fixed-income securities, iShares XEG ETF can reflect the Canadian energy industry’s performance based on the 14 publicly-traded energy companies it holds.
iShares XEG ETF Asset Allocation
This section of my reviews typically discusses the asset allocation split between fixed-income and equity securities for the ETF. However, take note that the asset allocation for iShares XEG is almost entirely in equity securities.
As of March 29, 2021, iShares XEG ETF has allocated 99.97% of its funds to equity securities. It holds the remaining 0.03% of its assets in cash and derivatives, making it an all-equity ETF.
iShares XEG ETF Top Holdings
This section of my iShares XEG review will take a closer look at the ETF’s asset allocation for its top ten holdings. iShares XEG is an all-equity ETF, so its entire asset allocation is towards stocks that constitute the S&P/TSX Capped Energy Index.
Canadian Natural Resources Ltd. is its most significant holding, accounting for a quarter of its total assets. At 25.77% asset allocation as of March 29, 2021, Canadian Natural Resources is its largest holding.
Suncor Energy Inc. closely follows it at a 24.69% weighting. Cenovus Energy is its third most significant holding at a 12.68% weighting.
iShares XEG ETF Sector Weighting
I typically discuss the sector weighting of an ETF in this section of my review. However, my iShares XEG ETF review will take a closer look at how the portfolio divides its funds within the energy sector’s different segments.
Its most significant asset allocation is towards the Oil & Gas Exploration & Production segment at 54.98% as of March 29, 2021.
Its second most significant asset allocation is towards the Integrated Oil & Gas segment at a 44.62% weighting. As of March 29, 2021, iShares XEG ETF holds the remaining 0.40% in cash.
iShares XEG ETF MER and Fees
iShares XEG has a Management Expense Ratio (MER) of 0.61%, which is considerably higher than several other ETFs.
However, its MER is significantly lower than mutual fund products that provide investors with similar features and benefits. With mutual fund fees averaging around 2% or higher, ETFs that offer lower MERs—like iShares XEG—is also a crucial reason why many Canadians have started investing in ETFs than in mutual funds in recent years.
iShares XEG ETF Performance and Returns
Considering that iShares XEG ETF allocates its assets to just 14 Canadian energy companies, it is no surprise that the fund’s performance and returns to shareholders have been all over the place since its inception.
It is a pure-play energy sector ETF that expresses the energy industry view. Canada’s massive oil sand operations have been prolific over the years, but commodity price volatility has significantly impacted iShares XEG ETF’s performance and returns.
With no exposure to fixed-income securities and a lack of geographic and sector diversification, iShares XEG ETF’s performance depends entirely on how well Canadian energy sector operators are doing. Declining commodity prices, low crude oil demand, and several other factors play a significant role in how it performs.
The growth of a hypothetical $10,000 since the fund’s inception shows that the ETF’s performance is highly volatile.
It saw its all-time high during the summer of 2008. However, it experienced a sharp decline by the end of the year. Since then, the ETF has never fully recovered to the same levels.
The arrival of the pandemic in 2020 and several other challenging periods for the global energy sector also devastated its gains.
Although iShares XEG ETF is currently trading for more than it did since its inception, it is a far cry from its all-time-high valuations. Instead, the fund’s focus on Canada’s energy sector makes it a significantly high-risk investment to consider.
Volatile commodity prices, change in demand, and several unforeseen factors can significantly impact the fund’s ability to provide you with returns. The lack of diversity and exposure to fixed-income securities also means that there is nothing to offset the volatility of the fund’s assets.
Its greater exposure to a few companies means that each of its assets has more influence on the ETF’s performance than with most ETFs that invest in a greater number of ETFs.
iShares XEG ETF Dividend Yield
iShares XEG provides its investors with returns through capital gains. Its trailing 12-month dividend yield as of March 29, 2021, is 2.01%. Sporting a 1.96% distribution yield, it pays out dividends to its unitholders every quarter. Its last distribution per share, as of March 19, 2021, was $0.04.
iShares XEG vs. Other ETFs
iShares XEG ETF vs. iShares XIC ETF
iShares XIC is an ETF that you can consider investing in if you want to track the overall Canadian stock market’s performance. iShares XIC allocates its funds to the top Canadian companies based on their market capitalization.
Unlike iShares XEG, iShares XIC diversifies across all Canadian economic sectors. To be specific, iShares XEG ETF holds 14 stocks, while iShares XIC ETF invests in a basket of over 200 companies. Clearly, you can count on a lot more diversity and greater protection from iShares XIC.
iShares XIC ETF can be a viable alternative to iShares XEG ETF if you want broad exposure to the Canadian equity security market with lower risk tolerance. You can find out more about iShares XIC in my full iShares XIC ETF review here.
iShares XEG ETF vs. Horizons HXE ETF
Horizons HXE is another ETF to consider investing in if you want to track the Canadian energy sector’s performance. It is an ETF product offered by Horizons, and it seeks to replicate the same index’s performance as iShares XEG. Hence, both the ETFs’ holdings are similar.
Take note, however, that while Horizons HXE has the same top ten holdings, its allocation towards individual assets may differ from iShares XEG’s in terms of weighting.
Another notable difference is that Horizons HXE has a substantially lower MER of 0.27% than iShares XEG ETF’s 0.61%. Lastly, Horizons HXE ETF was launched in 2013, making it significantly newer than iShares XEG.
Horizons HXE can be a viable alternative to iShares XEG because of its significantly lower MER.
Is iShares XEG ETF a Good Investment for You?
Despite their lack of exposure to fixed-income securities, most all-equity ETFs offer a sense of security through sector or geographic diversification. However, iShares XEG is a higher-risk investment than most all-equity ETFs due to its significant focus on the energy sector.
This exposure has been the primary reason for its volatility over the years since its inception. Although focusing on the energy sectors means significant growth when commodity prices are doing well, the same exposure devastates investor returns when oil prices and demand decline.
This might be reason enough for you to be concerned about your capital’s safety if you are a conservative investor. With no exposure to fixed-income securities and focused exposure to Canadian energy companies, iShares XEG may be too high of an investment risk to consider.
Nonetheless, iShares XEG ETF can be a suitable investment if you are convinced that the energy sector will boom in the coming years.
How to Buy BlackRock iShares S&P/TSX Capped Energy Index ETF in Canada
My two favourite ways to buy iShares XEG ETFs in Canada are the following:
- Questrade – I use Questrade, Canada’s leading discount broker, to trade most of my stocks. It has a desktop and mobile trading platform. All Canadian ETF purchases are commission-free, but be aware that selling ETFs will cost a small fee. With this special offer, you can also get $50 of commission-free stock trades here.
- Wealthsimple Trade – Better known as a robo-advisor, Wealthsimple has now released this fantastic trading platform that now comes in both desktop and mobile versions. All Canadian stock and ETF trades are commission-free. Get a $10 signup bonus when you sign up here.
Suppose you are an investor seeking exposure to a basket of Canadian energy companies trading on the TSX without having to rebalance your portfolio manually. In that case, iShares XEG can be a viable investment. However, Horizons HXE also offers exposure to a similar basket of Canadian energy stocks at a lower cost.
I have my reservations about XEG ETF’s lack of diversity and focus on a relatively smaller stocks basket. The fact that it has a higher MER than Horizons HXE also lessens my interest. All in all, iShares XEG ETF does not get a Wealth Awesome stamp of approval.
iShares XEG ETF Review 2021: Invest in Canadian Energy Companies
Are you looking for exposure to a basket of Canadian energy companies? This Wealth Awesome iShares XEG ETF review can provide you with information about a suitable solution.
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