The energy sector remains a significant component of the TSX, accounting for approximately 15.4% of the S&P/TSX Composite Index. The broader index has seen significant momentum, recently surging to new record highs above 31,000 late in 2025, supported by the strength of resource-based stocks.
As commodities prices rose due to runaway inflation, energy stocks delivered high returns, outperforming other sectors and the broad market. Investors who maintained or increased their exposure to energy stocks during this period benefited from these positive trends.
The Canadian energy sector has maintained its rally, delivering impressive returns of over 16% in the 12 months leading up to December 2025. This outperformance is driven by several key trends:
- Natural Gas Renaissance: The sector is betting heavily on Liquefied Natural Gas (LNG) exports, with the successful loading of LNG Canada’s first cargo putting Canada on the map as an exporter and expected to drive gas price forecasts higher through 2026.
- Infrastructure & AI Demand: Both traditional pipeline operators and newer gas producers are benefiting from surging demand for industrial energy and power generation, particularly tied to the massive build-out of AI data centers across North America.
- Production Growth: Oil and gas producers are poised for modest production growth in 2026, especially among gas-weighted companies anticipating growth of about 6.3% as market access expands.
However, navigating this complex environment of commodity volatility, new regulations, and intense merger and acquisition (M&A) activity can be time-consuming for individual investors. A more hands-off, diversified approach using exchange-traded funds (ETFs) that track TSX energy stocks offers an efficient alternative for investors seeking exposure to this evolving sector in 2026.
What is an energy ETF?
An energy ETF is a fund that tracks a basket of energy sector stocks. Within the Canadian stock market, this includes companies involved in the production, processing, and sale of energy products and services. Examples include oil, natural gas, and renewable energy companies.
Like energy stocks, energy ETFs can be bought and sold daily with great liquidity on most stock exchanges intra-day. They can also be held in all types of investment accounts, including tax-free savings accounts (TFSA) and registered retirement savings plans (RRSP).
Energy sector ETFs can come in both passive and active forms. The differences are:
- Passive: Track an externally provided energy stock index and must follow its rules.
- Active: The fund manager picks and chooses energy stocks based on their own investment criteria.
Energy sector ETFs can also be constructed using two approaches: market capitalization weighted versus equally weighted.
- Market-cap weighted: Large-cap energy sector stocks are held in greater proportions compared to mid– and small-cap energy sector stocks.
- Equally weighted: All energy sector stocks are held in identical proportions regardless of their market capitalization.
Like all ETFs, energy ETFs will charge a management expense ratio (MER). This is the percentage fee deducted annually from your investment for their services. For example, an energy ETF with a MER of 0.25% would incur around $25 in annual fees for a $10,000 investment.
Another benefit of energy ETFs are dividends. Because many Canadian energy stocks are dividend payers, an energy ETF that holds them will also pay dividends. Compared to individual energy stocks that payout quarterly, energy ETFs often pay out dividends monthly. This can be desirable for investors seeking more consistent income.
Top energy ETFs in Canada
The following Canadian energy ETFs have a combination of low fees, broad diversification, and high assets under management.
| Energy ETF | Inception Date | MER |
| iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) | 2001-Mar-19 | 0.60% |
| BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO) | 2009-Oct-20 | 0.60% |
| Horizons S&P/TSX Capped Energy Index ETF (TSX:HXE) | 2013-Sept-16 | 0.27% |
iShares S&P/TSX Capped Energy Index ETF
This market-cap weighted ETF, the iShares S&P/TSX Capped Energy Index ETF (TSX: XEG), passively tracks its namesake index, holding about 26 stocks with approximately $1.41 Billion in assets. It is highly concentrated, with its two largest holdings—Canadian Natural Resources (CNQ) and Suncor Energy (SU)—making up nearly half (48.6%) of the fund. XEG carries an MER of 0.60% and delivered a strong YTD return of over 20% through late 2025.
BMO Equal Weight Oil & Gas Index ETF
The BMO Equal Weight Oil & Gas Index ETF (TSX: ZEO) tracks the Solactive Equal Weight Canada Oil & Gas Index, providing exposure to 15-16 large-cap Canadian stocks, ensuring a more balanced portfolio distribution (each holding is roughly 7.5%–8.25%). This equal-weight approach aims to minimize reliance on the sector’s largest players, giving smaller companies greater influence on performance. It has an MER of 0.61% and $234 Million in AUM.
Horizons S&P/TSX Capped Energy Index ETF
The Horizons S&P/TSX Capped Energy Index ETF (TSX: HXE) replicates the performance of the S&P/TSX Capped Energy Index but utilizes a Total Return Swap (TRS) structure. It pays no dividends as returns are reinvested automatically, potentially offering tax-deferral benefits in non-registered accounts. HXE is a lower-cost option with a Management Fee of 0.25% and is now managed by Global X Investments Canada Inc.
Pros of investing in energy ETFs
Energy ETFs can be an excellent addition to an investment portfolio due to the following reasons:
- Diversification: The energy sector is counter-cyclical and can provide diversification benefits if held with popular indexes like the S&P 500.
- Hedging: Historically, energy has outperformed during times of increasing inflation due to soaring commodity prices.
- Liquidity: Energy sector ETFs are high in liquidity, meaning they’re very easy to buy and sell. They benefit from low bid-ask spreads and high daily trading volumes.
- Simplicity: Managing a single energy ETF is easier than buying a portfolio of many individual energy stocks and rebalancing them.
- Dividends: Energy ETFs often have a high yield thanks to the dividend-paying nature of their underlying holdings.
RELATED: Top S&P 500 ETFs in Canada
Cons of investing in energy ETFs
However, energy ETFs might not be a suitable holding for all investors. Reasons for this include:
- Volatility: Energy stocks can be volatile and susceptible to fluctuations in commodity prices. Investors who buy an energy ETF must be able to cope with potentially high unrealized losses.
- Fees: Energy ETFs often charge a significantly higher MER than regular index ETFs do. Index ETFs can go as low as 0.04% in Canada, whereas the lowest-cost energy ETF charges 0.27%.
- Poor performance: There have been prolonged periods where energy stocks have underperformed other sectors and the broad market. Investors who buy energy ETFs must be able to cope with extended underperformance without panic selling.
- ESG considerations: Investors who value environmental, social, and governance (ESG) factors may not like energy sector ETFs that hold companies with potentially incongruent practices.
Are energy ETFs right for you?
Whether energy ETFs are a good investment for you depends on your time horizon, investment objectives, and risk tolerance. In general, an allocation to energy ETFs is best suited for long-term, intermediate-level investors who understand the sector well and envision bullish long-term prospects for it.
If your goal is to hedge against unexpected inflation or bet on increasing commodity prices, then an energy ETF might be a good way to overweight energy stocks in your portfolio stock-picking. Keep in mind that this can create additional volatility and increase your expenses.
Canadian investors should also keep in mind that most TSX index ETFs already hold a significant allocation from the energy sector. For instance, the S&P/TSX 60 Index is comprised of 19.2% energy stocks. Investors should be aware of this and not excessively overweight energy ETFs.