Investors betting on a rebound in the energy sector can pick from a diversified list of low-cost exchange-traded funds, but the industry remains risky amid ongoing oil price volatility.
The latest shock for oil prices was the coronavirus, which disrupted businesses in China – the world’s biggest importer of the commodity – and meant lower consumption in that country.
For some investors, a drop in the price of oil is a buying opportunity.
“Given you’re supposed to buy low and sell high, maybe this is the perfect entry point?” says Lara Crigger, a senior staff writer with ETF.com.
Here are six ETFs energy investors might want to consider, based on geography and some specialized plays:
Want to buy local? Consider these two Canadian energy sector-focused ETFs:
If you’re playing a hunch the energy sector is ready for a revival, “this would be the vehicle” to own, says portfolio manager Daniel Tersigni with Wealthsimple Inc. in Toronto.
With more than $570-million in assets under management (AUM), XEG is the largest ETF focused on Canada’s oil and gas industry. XEG has a 0.61 per cent management expense ratio (MER) and is a highly concentrated play on the big players with Suncor Energy Inc., Canadian Natural Resources Ltd. and Cenovus Energy Inc. as its top three holdings.
Investors who own broad-based Canadian equity ETFs may already hold some of these firms, Mr. Tersigni notes. XEG is down about 7.6 per cent over the past year. (All performance data, unless otherwise stated, is as of Feb. 5)
Investors seeking more balanced exposure to Canadian energy players can look to ZEO, which uses an equal weighting allocation, as opposed to XEG’s market-capitalization weighting. Exposure to larger companies is reduced and increased for smaller firms in this fund, says portfolio manager Gordon Ross with ModernAdvisor in Vancouver.
“But ZEO has only 11 holdings, all of them fairly large-cap,” he notes. This more focused approach paid off last year, with ZEO posting a 16.5-per-cent return. The ETF, which charges a 0.61 per cent MER, is up about 3 per cent over the past year.
The U.S. and beyond
Investing in Canadian ETFs alone would mean missing out on the world’s largest energy producers. These international ETFs provide that exposure.
The U.S.-listed ETF provides diversified exposure to the U.S. industry – encompassing many of the world’s largest producers – but its equal-weighting ensures investors are not overly concentrated in the biggest players, says Todd Rosenbluth, head ETF and mutual fund research at CFRA in New York.
“The fund is more diversified with an equal stake in more moderately sized companies such as Cabot Oil & Gas, Diamondback Energy and EOG Resources.”
The risk, however, is the strategy provides more exposure to smaller firms, increasing volatility.
Its 0.4 per cent MER puts it among the least costly in the sector. RYE lost about 11 per cent over the past 12 months.
For a more global energy investment, FILL is a market-cap weighted passive fund that tracks oil and gas companies listed in both developed and emerging markets.
“FILL primarily holds exploration and production companies, with a large percentage in integrated oil and gas,” Mr. Ross of ModernAdvisor says.
While it has only about $44-million in assets, small for a U.S.-listed ETF, its 202 holdings “are not small, with a weighted average market cap of $130-billion,” Mr. Ross says.
Its 0.39 per cent MER puts it among the lowest cost ETFs in the sector. FILL is down about 9 per cent over the last year.
Alternative energy ETFs
Investors seeking alternative approaches can look to ETFs involved in energy infrastructure or other sector subsets.
U.S.-listed EMLP is among the top-performing energy funds in the last year, says Ms. Crigger of ETF.com, with a one-year return of 13.6 per cent.
Its master limited partnership (MLP) structure sets it apart from other options listed here. And it offers the tax efficiency of a private partnership, in which profits are only taxed when investors receive distributions, paired with the liquidity of a publicly traded security.
Both qualities make MLPs ideal investment vehicles for holding pipeline companies and other energy infrastructure firms paying regular dividends, says Mr. Crigger.
“The good thing about these is they provide income whether a commodity’s price is going up or down,” she says.
Its $2.8-billion AUM makes it one of the more popular ETFs, Ms. Crigger says. Albeit, EMLP is costly, with a 0.95 per cent MER.
This ETF takes a targeted approach to large positions major exploration and producers, such as ConocoPhillips, Pioneer Natural Resources and Valero Energy, which CFRA “finds attractively valued for 2020,” says Mr. Rosenbluth.
Although these firms have positive earnings projections, IEO is heavily concentrated, he says, “which could result in securities specific risks.”
The fund has $202-million in assets and an MER of 0.42 per cent. It is down about 14 per cent over the last 12 months.