While oil and oil production exchange traded funds (ETFs) are enjoying a strong performance, let’s further examine one of the latest ETFs in this area: the Claymore/SWM Canadian Energy Income (ENY). As we’ve mentioned before, this is an unusual ETF in that it rotates its allocations during bear and bull markets.
ENY invests in Canadian Royalty Trusts (CanRoys) and oil sands producers. CanRoys balance the risker, expensive oil sands producers by having a high dividend payout thanks to a special tax status, according to Zoe Van Schyndel of The Motley Fool. The market is said to be in a bull phase when the quarter’s closing price is above the four-quarters moving average price, so the oil sands receive 70% of the investment. The market is considered in a bear phase when the quarter’s closing price is below the moving average price, so the heavy investment goes to the CanRoys.
One concern is the large amounts of energy and water used in the oil-making process that cause higher production costs in the oil sands. Look for their costs to rise further as the Canadian government announced recently that it has to phase out some oil sands tax incentives starting in 2011.
Because ENY just launched in June, the jury is still out on whether this different ETF strategy will provide the returns investors want. If the price of oil goes up and the tax incentives phase out, it will be interesting to see how ENY compares to other energy-related ETFs.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.