2 Top Ways to Invest in Oil Stocks in April 2023

These ETFs provide exposure to a diversified portfolio of Canadian oil stocks.

| More on:

Are you looking for a combination of high dividend yields and inflation protection? You may want to consider oil and gas stocks, which Canada’s stock market has an abundance of. For instance, a popular pick like Enbridge has a forward annual yield of 6.78% as of April 4, 2023.

However, Enbridge is still a single stock. While it may be a solid company, sinking a large portion of your portfolio into it isn’t the best in terms of diversification. The solution here is to add some of Enbridge’s peers from the energy sector, especially those from the oil and gas industry.

While investors can pick and choose individual stocks (and the Fool has some great recommendations at the end of this article), I think buying an oil and gas exchange-trade fund, or ETF, could offer a palpable alternative. Let’s take a look at the two ETFs I’d buy if I wanted to invest in oil stocks.

iShares S&P/TSX Capped Energy Index ETF

First up, we’ve got iShares S&P/TSX Capped Energy Index ETF (TSX:XEG). This ETF has got 22 Canadian energy companies in its pocket, with big names like Canadian Natural Resources and Suncor Energy both making up about 22-25% of the ETF. If you’re a fan of these energy giants, XEG is a good pick.

Now, XEG is a “capped index,” meaning it limits each stock’s weight to 25% max. This keeps things balanced and stops one stock from taking over the whole ETF. To own XEG, it’ll cost you a 0.61% expense ratio, which works out to paying $61 a year for a $10,000 investment.

My main gripe with XEG is its market-cap weighted methodology. As seen above, the larger a Canadian energy stock is, the more space it takes up in the ETF. Right now, nearly 47% of the ETF is held in Suncor and Canadian Natural Resources. However, there is an alternative to XEG.

BMO Equal Weight Oil & Gas Index ETF

Let’s look at BMO Equal Weight Oil & Gas Index ETF (TSX:ZEO). ZEO holds just 10 energy sector stocks making it a more focused bet than XEG. This ETF is all about equal opportunity, giving each stock around 10% weight. You’ll find Canadian Natural Resources, Suncor Energy, and Enbridge in the mix.

With ZEO’s balanced approach, you get a better taste of the TSX energy sector’s overall performance rather than just tracking the big guns. Because each stock is held in equal weights, you can worry less about concentration risk. ZEO also has a 0.61% expense ratio, so it’s equally budget friendly as XEG.

ZEO also has much more of a pure-play oil and gas focused compared to XEG. Other companies in its portfolio include Imperial Oil, Arc Resources, Pembina Pipeline, Tourmaline Oil, and Keyera. Thanks to the equal-weighting strategy, these companies get decent exposure.

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, and Pembina Pipeline. The Motley Fool has a disclosure policy.

More on Energy Stocks

analyze data
Energy Stocks

Buy 8,850 Shares of This Top Dividend Stock for $2,000/Month in Passive Income

Let's do the math on what it would take to generate $2,000 a month in passive income from Enbridge (TSX:ENB)…

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Is Canadian Natural Resources Stock a Good Buy?

CNRL is an energy giant with a market capitalization near $100 billion.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Baytex Energy Stock a Good Buy?

Baytex Energy is a TSX stock that has massively underperformed the broader markets in the past decade, but it trades…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Suncor a Buy for its 4.2% Dividend?

Suncor Energy (TSX:SU) has a 4.2% yield. Is it a buy?

Read more »

engineer at wind farm
Energy Stocks

Energy Stocks to Buy Now: Top Picks for Canadian Investors

These companies have a solid business model and growing cash flows to support higher dividend payments and share prices.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Is Enbridge Stock a Good Buy?

Enbridge provides a 6.5% dividend yield right now.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor stock looks undervalued as the company continues to increases cash flows, earnings, and shareholder returns.

Read more »