Review: Claymore/SWM Canadian Energy Income Index ETF
When I first read about the Claymore/SWM Canadian Energy Income Index ETF (ENY: 18.25 0.00 0.00%) I was very intrigued. I have looked at both energy royalty trusts as a source of excellent income and Canadian oil sands companies as growth opportunities.
The Canadian energy royalty trusts are losing tax advantages on their distributions for Canadian citizens, so share prices have been beaten down and yields are up. Yield currently range from 8% to 16%. To quote Kurt Wulf, oil & gas expert:
Representing real assets, oil and gas income stocks are among the soundest long-term investments in our view. In a time of wider market fluctuation, it is reassuring that financial risk is low… (www.mcdep.com)
Canadian oil sands are a fairly new industry resulting from improving extraction technology and world oil prices high enough to make oil sand extraction profitable. Production capacity is growing strongly pointing to higher future revenue streams. If oil prices stay high these companies should have excellent profit growth. Also trading in Canada is the Canadian Oil Sands Trust COS-UN.TO with a 6% plus yield.
So this ETF ENY give a combination of strong income and possible growth in stocks that are often hard or impossible to trade in the U.S. However I have two issues with this security as it currently stands:
One: The portfolio will have a reversible 70%/30% split between royalty trusts and oil sands depending on whether oil prices are considered to be in a “bull” or “bear” phase:
If the current quarter’s closing price is above the four quarter moving average price, crude oil is determined to be in a bull phase. If it is at or below the moving average price, crude oil is determined to be in a bear phase.
Crude oil price trends are evaluated at the end of each calendar quarter and tactical asset allocation adjustments are implemented on the first trading day of the new quarter.
In a bull phase the fund will be 70% oil sands and in a bear phase it will be 70% income trusts. To me, this looks like a recipe to buy high and sell low. I would rather see a fixed allocation between the two groups, or base the amount of oil sands on the world price of oil vs. the extraction cost per barrel of oil sands.
Two: The prospectus shows that income distributions will be annual. Most of the income trusts pay monthly distributions. The name if the ETF does say “Energy Income Index”. I would expect distributions at least quarterly.
So, for me, this ETF (ENY: 18.25 0.00 0.00%) has an intriguing concept but flaws in the execution. ENY is less than two months old, so I will be looking for the initiation of regular income distributions before giving it more consideration.
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Comments
Derek, I really appreciate the comment here. I will keep an eye on the ETF and have high hopes it can provide a good balance of income and growth. A couple of quarters with good dividends will really give it a boost in my mind. With current energy prices and future projected demand, I think Canadian energy has excellent prospects.
Interesting post – stumbled across it while researching oil and energy investment opps – would be interested to know whether your predictions about oil sands producers were justified?
Tim,
I want to thank you for your insightful analysis of Claymore’s ENY ETF. As the index provider for this new ETF I have a vested interest in its success. I expect that the fund will have quarterly distributions regardless what the prospecctus says but I will look into that and get back to you.
You have an interesting point about the fixed asset allocation. The history on the index indicates that the asset allocation has added value except for when the Canadian government made the announcement on royalty trust taxation last year. Historically this index has generated 8-10% yields during the bear phase and 4-6% yields during the bull phase (currently we are in a bull phase). This compares well with the TSX/S&P Capped Energy Index which has a lower yield of 2.3% and inferior returns and higher risk over the last 3 plus years.
My long term expectation is that the strong cashflows from oil sands producers will increase the dividend yield over time and provide investors with a low risk, high yield play on the energy sector.
Regards,
Derek Gates
SWM Index