Riding oil prices higher requires some smart shopping for the right vehicle.
Let's test drive three choices for the investor who wants decent power, but also a degree of comfort and convenience. On the sensible side, we have energy-focused mutual funds. For those who like a touch more horsepower, we have oil stocks and exchange-traded funds that track changes in oil prices, or indexes of energy stocks.
There's a small pool of energy-focused mutual funds and only one that really stands out: It's CI Signature Global Energy Corporate Class, a $132-million fund that has outperformed the S&P/TSX capped energy index since inception in June, 1998; ranked among the leaders in the natural resource fund category in the horrendous year of 2008 (it fell 30 per cent, compared to 44.8 per cent for the average natural resource fund); and returned a category-leading 12.4 per cent annually over the past decade.
The problem: It's not a dedicated energy fund. As of April 30, just under two-thirds of the assets were invested in energy, with the rest scattered among materials, industrials, utilities and other areas. A good fund, but a compromise if your goal is to ride oil prices higher.
With oil stocks, the challenge is to pick a single name out of the many in the sector. The S&P/TSX capped energy index alone has 45 constituents, and there are dozens and dozens of junior names listed on the TSX. Let's stick to senior names in the oil patch, insist on a dividend (it shows stability) and eliminate energy trusts because of the uncertainties attached to the introduction of the new trust tax in 2011. This leaves us with three giants - EnCana , Suncor Energy and Imperial Oil . We can rule out EnCana because it's mainly a natural gas producer. We're looking for oil in particular, here. That leaves Imperial, a steady blue-chip, and Suncor, which has become a kind of national energy champion with its pending merger with Petro-Canada. Let's go with Suncor, which pays a small dividend yielding about 0.5 per cent and has been one of the best energy performers over the past five years (140 per cent total return versus 88 per cent for the S&P/TSX energy index).
In the ETF world, you have several notable choices. One is the U.S. Oil Fund , which trades on the New York Stock Exchange and is designed to track moves in the price of the benchmark West Texas intermediate oil grade. The drawback with this ETF is that it's vulnerable to Canada-U.S. currency volatility. A rising loonie could undermine or even altogether eclipse any gains from this ETF. Better to focus on TSX-listed ETFs, then.
Let's rule out one such product, the Claymore Oil Sands Sector ETF because it specializes in oil sands producers rather than taking a broader approach. This leaves us with two possibilities: a tried-and-true ETF, and a new choice that hasn't yet been listed for trading. The old reliable is the iShares CDN Energy Sector Index Fund , which tracks the S&P/TSX capped energy index and has done a good job of tracking crude oil prices. The newcomer is the Horizons BetaPro Nymex Crude Oil ETF, which will track oil futures contracts on the New York Mercantile Exchange and use hedging to block out moves in the Canadian and U.S. dollars.
Horizons already offers leveraged ETFs that allow investors to make two times a market gain or loss (in bull and bear versions) in various stock indexes and commodities, but they're controversial because long-term results have been highly unpredictable.
The new crude oil ETF will be unleveraged, which is to say it will reflect moves in its underlying commodity on a one-to-one basis. Fees should come in below the 1.15 per cent charged for the leveraged ETFs, which is high in the ETF world. By comparison, the iShares fund charges 0.55 per cent.
Some guidance on narrowing these choices: A single stock like Suncor offers the potential for superior long-term returns than an ETF, but more risk. As for ETFs, the new crude oil ETF looks promising but must bow to the seasoned iShares. Mutual fund investors: CI Signature Global Energy Corporate Class isn't a bad option at all.
This article first appeared in Globe Investor's Trade By Numbers e-zine. You can read more from the The Oil Trade issue at http://tinyurl.com/kqlt7v
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