A Rosy-Looking Future for Canadian Energy

 | May 03, 2012 | 10:30 AM EDT
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Investors looking to establish exposure to crude oil and other energy commodities have no shortage of options from which to choose. There are literally dozens of exchange-traded products that tap into the global oil industry, and several more that invest in futures contracts linked to these commodities.

At present, a number of rather successful investors are bullish on the energy sector -- Jeff Gundlach and Hugh Hendry are two big names who are expecting strong performances out of this corner of the market. I believe the best option for establishing an overweight energy position is one of the more unique ETFs out there -- and one that doesn't have an ounce of exposure to the usual suspects, such as ExxonMobil (XOM) and Chevron (CVX).

Canadian oil producers have come under pressure in recent years, with surging production in parts of the U.S. and relatively soft demand throughout the continent conspiring to push down prices and eat into profit margins. As recently as 2011, prices for Canadian light sweet crude oil traded at a premium to U.S. benchmarks. Now, the Canadian version of the fuel trades at a material discount -- about $3 per barrel.

The inversion of that premium has translated into a tough stretch for the Guggenheim Canadian Energy Income ETF (ENY). Despite relatively high oil prices, over the past year the fund has lagged behind other products that offer exposure to energy stocks. ENY has lost about 20% over the past 52 weeks, a loss that is considerably greater than the decline in the "plain vanilla" Energy Select Sector SPDR (XLE), which is down only about 8% over the last year.

But there are some indications that the not-so-distant future might be a bit brighter. Companies such as Enbridge (ENB) and TransCanada (TRP), both of which operate major pipelines, are moving ahead with plans to start shipping huge quantities of crude to the East Coast of the U.S. That would allow them to steer clear of the Midwest, which has an abundance of oil at present. The result would be a more market-driven distribution of available supply, and the related efficiencies could give a boost to prices in multiple locations.

If imports from Canada to the Midwest drop off -- as they obviously would if pipelines start running towards the East Coast -- the aforementioned premium would presumably deflate. That would be welcome news for the companies in Canada who are responsible for extracting the oil commodities in the first place, as they'd be able to sell their products at a higher price without incurring significant new costs.

There are obvious risks to such a strategy. For one thing, oil prices could decline across the board if investors got anxious over the outlook for Europe or slowing growth from China and other emerging markets. But the stars -- or, rather, pipelines -- seem to be aligning to put ENY in a position to make up some of the lag behind other energy products in coming months.

Further, when it comes to this fund, there's more to like than just the prospect of a change in energy infrastructure. This unique ETF also offers a relatively attractive dividend profile, sporting a 12-month yield north of 3%. That's obviously not an eye-popping current return opportunity, but it represents a material upgrade over many other energy products in the current environment.

As usual, some of the best opportunities are often in the nooks and crannies of the ETF industry. Those with a bullish outlook on the energy sector would perhaps be best served by an allocation in ENY, as opposed to more popular funds such as XLE.


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