HELLO, STOCK VOLATILITY.
Over the last couple of days, the Dow Jones Industrial Average has been more up and down than your average neighborhood crackhead. All sorts of things have been blamed for the volatility, from China’s hilariously inept efforts to deal with the implosion of stock markets there, to all the high frequency traders that sell everything immediately once some algorithm kicks in. But really, it’s God’s fault. He simply doesn’t want you to be rich. He’s seen what you do under the covers, and does not approve.
Anyhoo, the sell-off has led to some buying opportunities in certain parts of the market. I won’t bore you guys with the individual stocks I’m buying — for that, head on over to the other blog — but we will talk about blindly buying a sector that I think is very beaten up, energy.
Say you’re a long-term bull on oil and natural gas, like me. You’re also sexy as all hell and not the least bit showy about it, also like me. Congratulations, you are a perfect person. As a perfect person, you’re looking for a quick, easy, and cheap way to get in on those cheap energy stocks. Sure, you could scour financial statements until your eyeballs turn to goo in boredom, but most people reading this want nothing to do with that crap. They want results, and they want them now, dammit. What should they do?
The answer is easy. They should just buy an energy ETF and call it a day. They can even collect a dividend while waiting for the price to go up. We all like dividends, right?
But which one to choose? Let me help you with that. And by help you with that, I really mean lead you down the wrong path and inevitably get you bankrupt. Sorry in advance!
Fund: iShares Capped Energy Index ETF
Price/Market Cap: $9.86/$705 million
Management fee: 0.55%
Up first is the largest of the ETFs covering the sector, the iShares Capped Energy ETF. It has a reasonable management fee, has a high trailing dividend yield (which will inevitably come down because of all the dividend cuts in the sector), and has been around since 2001. Over the last year, it’s down pretty much exactly 50%.
Here are its top 5 holdings along with their weightings:
- Suncor (26.9%)
- Canadian Natural Resources (16.1%)
- Cenovus (7.5%)
- Imperial Oil (6.2%)
- Encana (3.7%)
As you can see, 43% of the fund’s assets are in just two stocks. Yeah, they’re the biggest and baddest in the sector, but it makes the ETF a little dependent on those two names. And if you add Cenovus in there, you’re at 50%.
It also means you’re looking at big oil sands exposure. The only one of those top 5 without most of its assets in the oil sands is Encana. Yeah, Suncor has downstream operations, but it’s still mostly an oil sands player.
Fund: BMO Equal Weight Oil and Gas ETF
Price/Market Cap: $9.31/$114 million
Management fee: 0.55%
The BMO ETF is a little more interesting, at least on the surface. Equal weighting implies that we shouldn’t see so much exposure to the giants of the sector. Is that the case? Here are the top holdings:
- Suncor (9.4%)
- Imperial Oil (9.4%)
- Enbridge (8.7%)
- Husky (8.6%)
- Pembina Pipeline (8.4%)
Yeah, it’s a much different ETF. It includes pipelines, which the iShares ETF didn’t. And it has Husky as one of its top holdings, not Canadian Natural Resources or Cenovus. And there’s definitely more diversification in the top holdings.
But the BMO ETF only holds 14 stocks in total, while the iShares ETF holds 54 total companies. And it isn’t such a great proxy to energy, since it has the pipelines in it to smooth things out. Excluding dividends, the BMO ETF is down just 33% over the last year. That’s good for people holding it over the iShares ETF, but probably not great for those of us looking for pure exposure to energy.
Fund: BMO Junior Oil ETF
Price/Market Cap: $13.01/$34.8 million
Management fee: 0.55%
Just in case the regular energy sector isn’t exciting enough for you, allow me to present the most turbulent part of one of the most turbulent sectors, junior oil. This ETF invests in small, start-up oil companies. You might get the next Suncor if you buy this ETF, but you’ll also get a whole lot of junk that never does anything. It’s like investing in a whole ETF of your loser cousin!
Here are the top 5 holdings.
- Diamondback Energy (7.9%)
- Western Refining (5.9%)
- World Fuel Services Corp (5.5%)
- Dril-Quip (4.4%)
- Patterson-UTI Energy (4.1%)
There’s a reason why you probably haven’t heard of these companies. They’re primarily U.S. traded, which means you’re adding in exchange risk into the equation. That’s probably not ideal, but this fund is probably your best way to really swing for the fences.
Fund: Horizons TSX Capped Energy Index ETF
Price/Market Cap: $16.02/$5.6 million
Management fee: 0.35%
This fund is very much like the first iShares ETF, but without the liquidity. The Horizons ETF traded just 1135 shares, for a grand total of $18,000, give or take a few bucks. You wouldn’t even need to be a high roller to move the price on this tiny ETF. Y’all should try it. Let’s push this thing around just to troll Horizons.
But hey, the management fee is pretty low. I assume it’ll gain assets as people realize that. It’s only been around for about a year now.
Here are the top holdings.
- Suncor (25%)
- Canadian Natural Resources (16.4%)
- Cenovus (7.4%)
- Imperial Oil (5.8%
- Crescent Point (4.2%)
Which should you choose?
I dunno. I’m not properly licensed to make decisions for you and even if I was, I wouldn’t anyway. You people sicken me.
I’d probably just choose the iShares one myself, just because of the better diversification. But there’s certainly the case for picking either of the BMO ones, depending on whether you wanted to roll the dice a little and go with the small-caps, or whether you want the protection of mixing in the pipelines. The Horizons one would be better if only it had some liquidity.
Still, when it comes to the ETFs, the sky is the limit. You could look at the U.S. energy ETFs, or even just bet on oil itself. That’s the beauty of the world we live in.