Beat Inflation With TSX Stocks – The Perfect Hedge Against Rising Prices

These two energy sector ETFs could work as a potential hedge against inflation.

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It turns out that Canadian inflation rates might be a bit sticky for the foreseeable future. The latest Consumer Price Index, or CPI, update just dropped on April 16th, and it did not look pretty. For the month of April, Canada’s inflation rose year over year by 4.4%, exceeding consensus expectations by economists.

After a brutal year in 2022 of multiple consecutive rate hikes, there was some relief when the Bank of Canada declared a pause earlier this year. This looks to be over as many are now expecting the Bank of Canada to resume rate hikes at its next meeting on June 7th, 2023.

Still, its not all doom and gloom for investors. The TSX is ripe with top energy sector stocks, many of which performed well during 2022’s inflationary conditions as commodity prices soared. If inflation sticks around, these stocks could be poised for another year of stellar returns.

Here’s a look at two exchange-traded funds, or ETFs, that Canadian investors can buy to access a diversified portfolio of TSX energy sector stocks.

The iShares option

So, the first on our list is the iShares S&P/TSX Capped Energy Index ETF (TSX:XEG), which holds a market-cap weighted portfolio of 28 Canadian energy sector stocks involved in oil and gas production, equipment and services, drilling, and integrated oil and gas operations.

Now, the ETF is market-cap weighted. What does this mean? Well, picture XEG like a big, comfy couch where 28 Canadian energy companies are just chilling, with the big kids – Canadian Natural Resources and Suncor Energy – hogging 47% of the seating space.

But here’s the kicker with XEG. It’s got a “capped index” rule, like a maximum weight limit on a carnival ride. It means that no single stock can bloat to more than 25% of the whole ETF. It’s all about balance, making sure one stock doesn’t turn into the couch potato and take over the entire ETF.

Now, I’m not entirely chuffed with XEG’s approach of giving more space to the heftier Canadian energy stocks, a bit like making the bigger kids take up more couch space. At the moment, almost half of the ETF is spread out between just two stocks. It’s also somewhat pricey with a 0.61% expense ratio.

The BMO option

If you want a more even smattering of TSX energy stocks on your metaphorical investing couch, then the BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO) might be a better pick. As its name suggests, this ETF assigns equal weights to each of its 10 holdings to ensure a more uniform distribution.

You still get exposure to Canadian Natural Resources and Suncor Energy, but you also get equal weight exposure to eight other TSX energy stocks, which include TC Energy, Imperial Oil, Arc Resources, Pembina Pipeline, Tourmaline Oil, and Keyera, Enbridge, and Cenovus Energy.

If you’re looking for a less top-heavy TSX energy sector play, then ZEO might be preferable to XEG. It also charges the same 0.61% expense ratio, so both ETFs are tied in terms of fees. Ultimately, the decision boils down to what type of exposure you’re looking for: market-cap versus equally weighted.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources, Enbridge, Keyera, Pembina Pipeline, and Tourmaline Oil. The Motley Fool has a disclosure policy.

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