Are you looking for a combination of high dividend yields and inflation protection? You may want to consider oil and gas stocks, which Canada’s stock market has an abundance of. For instance, a popular pick like Enbridge has a forward annual yield of 6.78% as of April 4, 2023.
However, Enbridge is still a single stock. While it may be a solid company, sinking a large portion of your portfolio into it isn’t the best in terms of diversification. The solution here is to add some of Enbridge’s peers from the energy sector, especially those from the oil and gas industry.
While investors can pick and choose individual stocks (and the Fool has some great recommendations at the end of this article), I think buying an oil and gas exchange-trade fund, or ETF, could offer a palpable alternative. Let’s take a look at the two ETFs I’d buy if I wanted to invest in oil stocks.
iShares S&P/TSX Capped Energy Index ETF
First up, we’ve got iShares S&P/TSX Capped Energy Index ETF (TSX:XEG). This ETF has got 22 Canadian energy companies in its pocket, with big names like Canadian Natural Resources and Suncor Energy both making up about 22-25% of the ETF. If you’re a fan of these energy giants, XEG is a good pick.
Now, XEG is a “capped index,” meaning it limits each stock’s weight to 25% max. This keeps things balanced and stops one stock from taking over the whole ETF. To own XEG, it’ll cost you a 0.61% expense ratio, which works out to paying $61 a year for a $10,000 investment.
My main gripe with XEG is its market-cap weighted methodology. As seen above, the larger a Canadian energy stock is, the more space it takes up in the ETF. Right now, nearly 47% of the ETF is held in Suncor and Canadian Natural Resources. However, there is an alternative to XEG.
BMO Equal Weight Oil & Gas Index ETF
Let’s look at BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO). ZEO holds just 10 energy sector stocks making it a more focused bet than XEG. This ETF is all about equal opportunity, giving each stock around 10% weight. You’ll find Canadian Natural Resources, Suncor Energy, and Enbridge in the mix.
With ZEO’s balanced approach, you get a better taste of the TSX energy sector’s overall performance rather than just tracking the big guns. Because each stock is held in equal weights, you can worry less about concentration risk. ZEO also has a 0.61% expense ratio, so it’s equally budget friendly as XEG.
ZEO also has much more of a pure-play oil and gas focused compared to XEG. Other companies in its portfolio include Imperial Oil, Arc Resources, Pembina Pipeline, Tourmaline Oil, and Keyera. Thanks to the equal-weighting strategy, these companies get decent exposure.