The beauty of exchange traded funds (ETFs) is that they trade like regular stocks when it comes to transactions. However, their added value is in giving you exposure to a board set of securities in a sector or a subsector with only 1 purchase. Investors use ETFs as portfolio building blocks to invest in a commodity such as wheat, soybeans or sugar. When it comes to oil, ETFs are perfect for subtracting the risk of exploration and production specific to production and exploration companies.
We will look at 4 Canadian ETFs that you can choose from along with a comparison versus WTI oil prices:
CLO – CLAYMORE OIL SANDS SECTOR ETF (CLO.TO $N/A [N/A])
MER (Management expense ratio): 0.66%
CLO Oil Sands ETF is designed to replicate the performance, minus expense, of the Sustainable Oil Sands Sector Index™ giving investors maximum exposure to one of the fastest growing industries in the Canadian energy sector and one of the largest reserves of oil in the world. The Index is restricted to companies that are highly focused on oil sands production and are expected to increase their oil sands production in the next ten years. CLO’s company holdings are 100% Canadian. CLO Oil Sands ETF began trading in October 2006.
ZJO – BMO Junior Oil Index ETF (ZJO.TO $11.76 [+0.01])
ZJO Junior Oil Index ETF is designed to replicate the performance of the Dow Jones North America Select Junior Oil Index, minus expenses. The index tracks stocks of oil and gas producers as well as oil equipment and services companies. By replicating a US Junior Oil Index, ZJO’s geographic exposure is 75% weighted to US companies leaving only 25% in Canadian holdings. ZJO ETF is a recent comer as it started trading in May 2010.
ZEO – BMO S&P/TSX Equal Weight Oil & Gas Index ETF (ZEO.TO $10.62 [-0.01])
ZEO Oil & Gas Index ETF is designed to replicate the performance of the S&P/TSX Equal Weight Oil & Gas Index, net of expenses. This index holds stocks involved in Oil & Gas Drilling, Oil & Gas Equipment & Services, Integrated Oil & Gas, Oil & Gas Exploration & Production, Oil & Gas Refining & Marketing, and Oil & Gas Storage & Transportation in an equal weight regardless of market cap of each company. ZEO’s company holdings are 100% Canadian. ZEO ETF was first introduced in October 2009.
XEG – iShares S&P/TSX Capped Energy Index ETF (XEG.TO $11.61 [+0.01])
XEG Energy ETF is designed to replicate the performance of the S&P®/TSX® Capped Energy Index, net of expenses. The index tracks stocks in the oil and gas sector excluding the following sub-industries: Refining, Marketing, Storage and Transportation. The fund’s weighting is overwhelmingly Canadian. XEG is the oldest ETF among its peer since it appeared in March 2001.
It’s up to you to pick the best ETF that will meet your needs. Consider the asset value of each fund and its liquidity if you’re not thinking of buying and holding for a long period of time. Management fees are in line with other ETFs and all 4 ETFs will pay you a dividend for holding.
We can conclude from the graph above that ZJO has been very responsive to the latest volatility in oil prices compared to its peers. If you are looking for oil ETF or Oil Stock ETF for trading purposes, you will find a host of leveraged ETFs on the US side covered under these links:
Just remember the risks associated with leverage and that these ETFs are suitable for hit and run trades and not a long term buy and hold strategy as they will fail to replicate the performance of the index they are tracking in the long run. Recently, AlphaPro launched commodity covered call etfs on oil and gas.
Disclaimer: the information presented above is only for informative purposes; it’s meant to serve as a starting point to carry your own due diligence. It is in no way an encouragement to buy or sell the aforementioned securities. If you find any errors in the data please do not hesitate to contact us using the appropriate form or by leaving a comment.