What are we looking for?
Canadian‑domiciled dividend ETFs that have less exposure to energy
The screen
The Bank of Canada held its key interest rate steady at 2.25 per cent this week – its sixth hold in a row. That part was expected. The trickier question for dividend investors is what to do about the volatility sitting just underneath that headline number. Oil prices have swung from over US$100 a barrel in the spring down to the US$70s more recently, driven by the conflict between the United States and Iran, and repeated disruptions to shipping through the Strait of Hormuz. The bank itself admitted that where inflation goes next – and what it does with rates as a result – now depends heavily on how that conflict plays out.
This matters more for Canadian dividend investors than it might elsewhere. Our stock market leans heavily on energy compared with those of other countries, and that shows up directly in some of the most popular dividend and equity-income ETFs on the market. Many of them currently hold energy stocks in the high-20-per-cent range of their portfolios – well above the roughly 20-per-cent average for the category. That’s not a knock against these funds; it’s just a natural result of chasing high yield in a market where energy and pipeline companies happen to pay some of the biggest dividends around. But it does mean that if you own two or three of these “diversified” dividend ETFs, you might be carrying a much bigger bet on oil prices than you’d guess at first glance.
To be clear, this isn’t about ditching energy altogether. Higher oil prices have been a real plus this year, helping energy companies generate cash and keep those dividends well-covered. Walking away from the sector entirely means giving that up. But if you’re someone who’s a bit nervous about how much of your dividend income is tied to a conflict that’s impossible to predict, dialling back that exposure – rather than cutting it out completely – might be a reasonable move. Holding less oil-related risk in your dividend investments isn’t a bet against energy; it’s just making sure you’re not doubling up on a bet you may already be making without realizing it, at a time when oil prices could drop just as fast as they climbed.
With that in mind, today I use Morningstar Direct to screen for well-rated dividend and equity-income ETFs – those with at least a 4-star rating or a Morningstar Medalist Rating of Bronze, Silver, or Gold – that have managed to keep their energy exposure meaningfully below that category norm: under 10 per cent for U.S. and global funds, or under 15 per cent for Canadian ones, versus a category average closer to 20 per cent. Quick refresher on those two ratings: the star rating looks backward, measuring how well a fund has performed after fees compared with its peers. The Medalist Rating looks forward – it’s Morningstar’s assessment of how likely a fund is to outperform its peers, based on the people running it, the firm behind it, and how sound and repeatable its investment process is.
What We Found
The qualifying funds based on the above criteria are listed in the accompanying table alongside tickers, management expense ratios, trailing returns, and net energy sector exposure. The ETFs were sorted into three categories (Canada, global, and U.S. dividend and income), then by energy exposure.
This article does not constitute financial advice, investors are encouraged to conduct their own independent research before buying or selling any ETF listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.