There will be a rebound in energy stocks at some point – the question for investors is how much risk they're willing to take on while they wait.
Three exchange-traded funds offer basic exposure to the Canadian energy sector and each has a different risk profile. The most risky is the iShares Oil Sands Index ETF (CLO), which has been hit hardest of the three and lost 24.7 per cent on a total return basis in 2014. It holds a 10-stock portfolio dominated by Suncor Energy, Imperial Oil and Canadian Natural Resources, each of which has a weighting between 15 and 18.5 per cent. These companies are big players in the oil sands and thus not held in great esteem by investors right now. Remember, the Alberta oil sands are one of the world's more expensive sources of crude.
The middling choice, risk-wise, is the iShares S&P/TSX Capped Energy Index ETF (XEG), which holds the shares of 57 companies (many of the same names as CLO are included). The difference here is that there's much broader exposure to energy – gas as well as oil – and producers with assets both in and out of the oils sands. XEG's one-year loss was 16.8 per cent.
The lowest risk choice on a comparative basis is the BMO S&P/TSX Equal Weight Oil & Gas Index ETF (ZEO), which holds 15 of the country's largest energy stocks in roughly equal proportions. Classic index investing means taking the index as it is, with the biggest stocks by market capitalization having the most influence. But the equal weighting approach appears to be tamping down the risk in energy to some degree.
XEG is the oldest and by far the most widely held of the three, with about $942-million in assets, while CLO is fairly small at $35-million. ZEO's at about $112-million, enough to suggest investors are noticing how it offers a slightly less bumpy ride than XEG.
One more thought on addressing the risk in energy is to buy an ETF tracking the broad Canadian stock market. Energy accounted for almost 21 per cent of the S&P/TSX composite index and, if oil prices were to rally, would certainly lead the index higher.