The Canadian energy sector recently entered into a period of seasonal strength. What are prospects this year?
According to EquityClock.com, the Canadian energy sector has a period of seasonal strength from Jan. 14 to May 10. Average return per period during the past 20 periods was 11.3 per cent, outpacing the S&P/TSX composite by a stellar 6.8 per cent. The energy trade during the first half of the year has had one of the highest frequencies of success out of all of the sector seasonal trades throughout the year. Positive results were achieved in over 85 per cent of the periods. Frequency of outperformance relative to the S&P/TSX composite exceeded 75 per cent.
Energy equity prices in the sector tend to lead energy commodity prices. Oil and gas prices tend to gain seasonally from mid-February through to the beginning of May during the period when refineries normally convert operations from heating oil production to gasoline production prior to the summer driving season. EquityClock.com notes that the average return for the price of crude oil during its period of seasonal strength has exceeded 13.0 per cent over the last 20 years. Higher oil and gas prices tend to benefit equities in the Canadian energy sector.
Recent colder-than-average weather in Canada and the U.S. northeast is contributing to early strength in energy commodities, which, in turn, is benefiting energy equities. The recent plunge in temperatures surrounding the polar vortex has created a floor for crude oil prices around $91 (U.S.) a barrel as demand from utilities to increase power for heating purposes increases. The impact has also been realized in another energy commodity, natural gas, which is trading at two-and-a-half-year highs. The Canadian energy sector offers greater exposure to strength in natural gas prices versus energy benchmarks in the U.S.
On the charts, the S&P/TSX Capped Energy index at 275.06 has an improving technical profile. Earlier this week the index broke above intermediate-term resistance around 274, advancing to an almost two-year high. Intermediate support remains apparent around 260. The index continues to find short-term support at a rising 20-day moving average. Strength relative to the S&P/TSE composite index turned positive earlier this week.
The easiest way to invest in the sector is through exchange-traded funds. The most actively-traded Canadian energy ETF is the iShares S&P/TSX Capped Energy Index Fund (XEG-TSX). The index is based on the performance of 52 Canadian energy stocks that are part of the S&P/TSX composite index. Largest holdings are Suncor, Canadian Natural Resources, Cenovus, Crescent Point, and Encana. Management Expense Ratio (MER) is 0.60 per cent.
Bank of Montreal offers an interesting twist on the same index. BMO S&P/TSX Equal Weight Oil and Gas ETF (ZEO-TSX) is based on a portfolio that holds 14 large cap Canadian energy stocks that are included in the S&P/TSX Capped Energy index. Each stock is equally-weighted, averaging around 7.1 per cent of the fund. MER is 0.55 per cent.
The latest Canadian energy ETF to come to market is the Horizons S&P/TSX Capped Energy Index ETF (HXE-TSE). The ETF holds a similar basket of equities to the product offered by iShares, but at a much lower fee at 0.35 per cent.
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.