The energy sector is volatile but it’s a heavyweight on the TSX. If not for the sector’s continuing surge, Canada’s primary stock exchange would have entered correction territory already. As of February 25, 2022, the year-to-date gain is 24.57%.
However, individual stocks might be safer options today than either income-focused energy fund. Most of the energy companies have been generating significant cash flows due to the favourable pricing environment. Both energy ETFs are dividend-payers, although cuts are possible if demand shocks similar to 2020 happen.
The fund’s target exposure is Canada’s energy sector. Its investment objective is to deliver long-term capital growth. XEG replicates the performance of the S&P/TSX Capped Energy Index. The fund has a high-risk rating and holds 23 energy stocks led by oil majors Canadian Natural Resources (26.14%) and Suncor Energy (24.15%).
BMO Equal Weight Oil & Gas Index ETF replicates the performance of the Solactive Equal Weight Canada Oil & Gas Index. The fund invests in the oil & gas sector, namely integrated (41.56%), storage & transportation (35.32%), and exploration & production (23.12%) companies.
Alternative mutual fund with ETF
Ninepoint Partners LP recently announced plans to launch a new investment vehicle. Eric Nutall, its senior portfolio manager, said the Ninepoint Energy Income Fund will focus on cash-flush energy companies, so it could distribute income to shareholders.
Floodgates might open
Energy ETF investors can’t be complacent. XEG and ZEO are excellent dividend plays for now. However, if OPEC decides to increase production and arrest the price surge, oil stocks could tank. Thus, a slash or stop to dividend payments, stocks or ETFs, could ensue.