iShares S&P/TSX Capped Index: Oil and Gas ETF with Potential 50% Upside.
$XEG Provides Opportunity for Income and Capital Appreciation.
Anyone who reads my articles knows I think we are currently in a secular bull market in oil and gas. In my opinion, $XEG.TO is a solid way to play the oil and gas market with its solid 1.61% dividend and diverse holdings of 13 stocks across the TSX. The fund’s mixture of large and mid cap equities represents a viable alternative to investors who want oil and gas exposure without as much volatility. In addition, the fund holds firms who’s operations aren’t all located in Canada; Parex resources for example has its oil and gas properties in Colombia. I take this as a positive because you have global property exposure within the sector. I will now go over a few of the reasons as to why I like this play for investors looking to dabble in the oil and gas market.
Why Oil and Gas?
Year-over-year revenue growth in the oil and gas sector has risen 133% compared to the S&P 500’s 24.7% making the sector outperforming the S&P by more than 5 times in revenue. However, despite impressive results from Oil and Gas companies, XEG.TO ETF has remained relatively flat over the past 6 months.
The main cause for the drawback in oil and gas sector was due to delta variant fears weakening demand and the Federal Reserve announcing that they would begin to taper their bond purchases. After a tumultuous August the drawback and consolidation appears to be over as delta variant fears begin to subside and they are still no signs of a Fed taper. The September 15th Energy Information Association (EIA) reported yesterday that the weekly U.S crude inventories changed by -6.42 million compared to the -3.54 million forecast, meaning that inventories declined by almost double of their initial forecast. Furthermore, China announced a few weeks back that they would begin to be tapping into their crude reserves to try and sedate price increases. As you can see, the supply side remains very tight and even with TreeHuggers and far left wing politicians running congress the U.S still consumes around 21 million barrels of oil per day. Lastly, the adoption of ESG investing has led to a flight of capital being divested out of the oil and gas sector and at a wrong time. The investment world as well as bureaucrats seem to have far too high expectations of technology fully replacing non-renewable sources of energy. Lastly, the fund remains incredibly cheap in terms of its historical value.
Fund Details.
As I said earlier, this fund only holds 13 oil and gas stocks which in my opinion provides some diversification, but remains concentrated enough to yield you a high return.
The top holdings consist of the more bluechip oil and gas companies while at the bottom you have your mid caps. I find it important to have exposure to oil and gas mid cap equities because they are more likely to avoid political pressure from progressive governments, especially if they operate in foreign countries like Parex. In addition, I also like the mixture of oil and gas exploration and production, as well as integrated oil and gas. The MER for this ETF is 0.61%, which isn’t expensive when you compare it to Arks Innovation Fund which is 0.75%. The fund is currently up 46% YTD.
Conclusion
The iShares S&P/TSX Capped Index is one of the best ways to play the Canadian oil market and is a better alternative than a typical passive index ETF. Oil and gas is here to stay and the world continuing to bottleneck supply isn’t going to do us any favours. Crude prices are rising and after the hurricane that hit Louisiana, gas prices may increase at an even faster rate than oil. I am hoping that my oil plays offset the increasing cost I will have to pay at the pump over the next year or two.