Oil Sands ETF Is One Dirty Winner

04/06/2011 1:14 pm EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Pollution qualms over strip mining in the Canadian north have taken a back seat to oil-supply worries, writes Gordon Pape in The Canada Report.

The turmoil in North Africa and the Middle East has again highlighted the strategic importance of Canada’s oil sands. Environmentalists hate them—and there is no doubt that they are a major polluter and a blight on the landscape of northern Alberta.

But they are safe, secure, and close to the United States. That counts for a lot these days!

The Claymore Oil Sands Sector ETF (Toronto: CLO, OTC: CYMNF) invests in companies that are highly focused on oil-sands production and expect to increase their output over the next decade.

Its benchmark is something called the "Sustainable Oil Sands Sector Index," which uses five factors to select companies that best represent the "current and future production" of the oil sands. They are:

  • current oil sands production volume
  • projected 10-year forward production
  • oil sands production as a percentage of total production
  • market liquidity
  • market capitalization

The fund was launched in October 2006.

The turbulence in the Middle East has already led to price increases at the gas pumps but, more important on a macro scale, it is raising alarms about the global supply of crude oil. That makes the Canadian oil sands—which hold the world’s second-largest reserves—even more strategically important, despite environmental concerns.

As a result, energy stocks generally and those involved in the oil sands in particular are moving higher. This ETF allows us to participate in future gains.

The fund holds a basket of 17 stocks. Most of the companies represented are not exclusively committed to the oil sands, and in fact some have a relatively small footprint there at present (e.g. Penn West Petroleum (PWE)). But all derive a significant portion of their revenue from the oil sands or expect to do so in the future.

The largest positions are in:

  • Suncor (SU), 9.33% of assets
  • Imperial Oil (IMO), 8.76%
  • Canadian Oil Sands (Toronto: COS, OTC: COSWF), 8.57%
  • Cenovus Energy (CVE), 7.87%
  • BlackPearl Resources (Toronto: PXX, OTC: BLKPF), 7.5%

[Suncor shares are up 5% since Pape recommended them in mid-February. Cenovus has risen 50% since Pape profiled it nine months ago—Editor.]

The ETF gained 22.7% in 2007, its first full year of operation. But it then plunged 54.2% when the bottom fell out of the oil market in the second half of 2008.

That was partially recovered in 2009 with an advance of 59%, which was followed by a gain of 15.3% in 2010. The fund has gained 13% so far in 2011.

To sum up, this ETF is suitable for aggressive investors who like its capital gains potential. The fund’s volatility indicates it should not be regarded as a buy-and-hold security.

Use it to take advantage of the current surge in oil prices—and be prepared to exit at any time.

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