Guggenheim Canadian Energy Income ETF Offers Yield and Exposure to Oil Sands

| About: Guggenheim Canadian (ENY)

Investors have been hearing a lot about oil sands stocks recently. The oil sands refer specifically to the Canadian oil sands located in the Alberta region of Canada. The massive crude reserves are second in size only to Saudi Arabia. In fact, Barron's published an article about it this week (Seeking Stability in the Sands, February 7, 2011). In the article Barron's writes favorably about the sector, picking several stocks that generate much of their revenue from the oil sands. Barron's lists Cenovus (NYSE:CVE), Canadian Natural Resources (NYSE:CNQ), Canadian Oil Sands (OTCQX:COSWF), Imperial Oil (NYSEMKT:IMO), Suncor Energy (NYSE:SU), Athabasca Oil Sands (ATH.Canada), and MEG Energy (MEG.Canada) as beneficiaries of demand for the oil extracted from sand.

Why are we hearing about the Canadian oil sands so much now? You can partly blame that on commodity inflation. Oil must be trading at a high enough price to make the cost intensive process profitable. According to the Barron's article it costs about $30 to $40 per barrel for extraction, two to three times the amount for conventional oil. In addition, the turmoil in the Middle East has reminded us that we have a good, friendly neighbor to the north that is rich in oil.

So what is the best way to profit from oil sands production? You could buy any one of the stocks mentioned in the Barron's article and do reasonably well as long as oil stays high. Of the individual names, I like Canadian Oil Sands, the only pure-play producer of the sector. The stock trades at a reasonable 14.6 times forward earnings and yields 2.8%. I also like Canadian Natural Resources, which only derives about 15% of its business from oil sands production. It also has large exposure to natural gas. Canadian Natural Resources trades at a reasonable 16.1 times forward earnings, though it only yields 0.7%.

For investors not willing to try and pick winners in the sector another way to profit is through the Guggenheim Canadian Energy Income ETF (NYSEARCA:ENY). This is an exchange traded fund that tracks an underlying index called the Sustainable Canadian Energy Income Index. According to, a website dedicated to ETF education and information, the index is designed to combine the most profitable and liquid Canadian royalty trusts with the most highly focused and fastest growing oil sands producers using a tactical asset allocation model based on the trend in crude oil prices.

ENY holds about 30 companies at any given time. Currently it is holding 36 companies. It is an income generating fund with a dividend yield of 2.7%. The fund's expense ratio is .70%.

Top Ten Holdings

Name Symbol Weighting
Canadian Oil Sands Ltd OTCQX:COSWF 6.80%
Suncor Energy, Inc. SU 6.60%
Imperial Oil Ltd IMO 5.60%
Ivanhoe Energy, Inc. IVAN 5.50%
BlackPearl Resources, Inc. OTCPK:BLKPF 5.30%
Cenovous Energy, Inc. CVE 5.30%
Athabasca Oil Sands Corp OTCPK:ATHOF 5.20%
MEG Energy Corp OTCPK:MEGEF 4.80%
Southern Pacific Resources Corp OTC:STPJF 4.60%
Canadian Natural Resources Ltd CNQ 4.60%

Data provided by XTF.

As you can see, all of the stocks mentioned in the article above are represented in the top ten holdings for ENY. The top ten holdings account for about 55% of the funds total holdings.

There are some risks to the stocks as well as the fund. Oil prices must stay high in order for the oil sands stocks to remain profitable. A sudden drop in crude prices would spell big trouble for these companies. In addition, ENY only has a net asset value of $120 million, making it a relatively small fund. The fund only trades about 130,000 shares per day, making it much less liquid than other energy ETFs.

With oil demand from China and the United States rapidly increasing, I don't foresee oil prices falling off a cliff. Other than some short-term bumps along the way, oil is most likely trending higher. In addition, Middle East turmoil puts a premium price on crude and makes the oil sands producers that much more profitable.

Let's face it, easily recovered oil is becoming more and more rare. It's nice to know that we have a friendly government to the north willing to fill our insatiable demand for crude. Investors wanting to gain exposure to oil, particularly the oil sands, would do well to use this ETF. Otherwise, if you are a stock picker stick to the names above.

Disclosure: I am long OTCQX:COSWF.

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