If you think energy is the place to be, you might want to look at the new Claymore/SWM Canadian Energy Income ETF
The Claymore/SWM Canadian Energy Income ETF was launched this month and charges a 0.65% expense ratio. The fund tracks the Sustainable Canadian Energy Income Index, which selects its components from 35 CanRoys listed on the Toronto Stock Exchange and profitable oil sands producers. Allocations between the two types of securities are made quarterly in a 70/30 split between the oil sands and royalty trusts according to the price trend of crude oil. If the current quarter's closing price is above the four-quarters moving average price, crude oil is determined to be in a bull phase, and the split emphasizes oil sands. If it's at or below the moving average price, crude oil is determined to be in a bear phase and the emphasis is on the trusts.
An expensive sandbox
Oil sands, or tar sands, as they are sometimes called, are a naturally occurring form of crude oil. Oil sands require a great deal of water and energy to process, making this an expensive form of energy extraction. The Canadian oil sands have been producing for the past 40 years. With the break-even cost for new production in the $50 (U.S.) per-barrel range, this can be a profitable business at current market prices, but that could change as quickly as oil prices have. In Alberta, where most of the Canadian deposits are found, labor and materials are in extremely short supply and have pushed prices up. Costs are likely to climb further because the Canadian government announced in its 2007 budget that it will phase out some oil sands tax incentives. Existing developments will get the allowance, and the incentives will be phased out starting in 2011.
Sand oil can act like the tar it's often mistaken for because it can be a dirty and messy business. Companies in the energy sector are highly dependent on worldwide energy prices, exploration, and production spending. These companies are also subject to exchange rate changes and government regulation, along with economic and political risks. Oil exploration and production companies may often be subject to environmental damage claims. Canadian markets can also have less market liquidity and generally experience greater market volatility than U.S. securities.
The Claymore/SWM Canadian Energy Income ETF has a very limited operating history, so it's hard to say what to expect for performance. One place to look is Claymore's Oil Sands Sectors ETF, launched in October of last year. The Oil Sands Sectors ETF tracks an index restricted to companies focused on oil sands production and has had a 17.6% return since it began. Of course, the Claymore/SWM Canadian Energy Income ETF and the Oil Sands Sectors ETF are not directly comparable because the first one doesn't focus solely on oil sands producers, and its exposure to CanRoys should dampen its risk somewhat.
The rewards for energy investors have been good over the past few years, but this performance comes with significant risk. The Claymore/SWM Canadian Energy Income ETF offers a unique opportunity to access the returns of oil sands producers, but it's suitable only for those fund investors who can withstand a concentrated exposure to a risky and volatile commodity. Be sure you understand the risk side of the equation before sticking your toes into the sand.
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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.