Why I Dislike the iShares S&P/TSX Capped Energy Index ETF (XEG)

Today, I am going to pick on the iShares S&P/TSX Capped Energy Index ETF (XEG). I will be honest with you - I do not like this fund at all.

Yes, it is one of the biggest Canadian energy ETFs at just under $2.1 billion in assets under management. And sure, it has a long track record, having launched all the way back in March 2001.

But for a variety of reasons that I will get into shortly, I personally view it as a pretty subpar option if you are looking for exposure to the TSX energy sector.

The reason I am writing this now is because the U.S./Israel versus Iran conflict has once again pushed Canadian oil stocks back into the spotlight.

With the Strait of Hormuz effectively shut down, a lot of investors are looking toward domestic producers and midstream infrastructure in more politically stable regions of the world.

Here are some of the main reasons I dislike XEG, along with one Canadian energy ETF alternative that I think is a better option.

Excessively High Fees

I am going to start with the easy criticism first: fees. XEG is simply too expensive for a Canadian sector ETF in 2026. The fund charges a 0.60% management expense ratio (MER). On a $10,000 investment, that works out to about $60 per year in fees.

Now, a 0.60% MER might have looked competitive back in 2001. At the time, the main alternatives were tax-inefficient mutual funds charging more than 1%. But those days are long gone.

Today, the ETF landscape is far more competitive. There are multiple alternatives available that charge significantly less, including the option I will mention later that costs less than half of XEG.

Personally, I am willing to pay 0.60% for a genuinely active strategy. I am not willing to pay that much for a passive index tracker.

A Nonsensical 25% Cap

Usually, I am a fan of index investing. But indexes are a mixed bag. There are well-designed benchmarks and there are poorly constructed ones. That is why I dislike the assumption that “index ETF automatically equals good ETF.”

Some benchmarks simply do not make sense, and the S&P/TSX Capped Energy Index is one of them. The index holds just 26 companies and is market-cap weighted. On top of that, each holding is limited to a maximum weight of 25% between rebalances.

That cap is so lax that it barely matters. Right now, two companies, Canadian Natural Resources (CNQ) and Suncor Energy (SU), together account for roughly half the entire portfolio.

That completely defeats the purpose of diversification. Even within a narrow sector bet like energy, it means that roughly 50% of the ETF’s risk and return can be attributed to just two holdings.

The Free Float Weighting Problem

Another issue I dislike is the index’s free-float weighting methodology. Instead of weighting companies by their total market capitalization, the index uses float-adjusted market capitalization.

That means only shares available to public investors are counted, while shares held by insiders or strategic owners are excluded. This can create odd distortions.

Take Imperial Oil (IMO) as an example. On paper, the company has a market capitalization of roughly $81 billion. But about 70% of its shares are owned by Exxon Mobil (XOM), leaving only around 30% available as public float. As a result, Imperial Oil ends up being weighted much smaller in the index than its actual size would suggest.

Personally, I find this unnecessary. If the goal is to build a market-cap-weighted index, then just weight companies by their market cap. The free-float adjustment ends up splitting hairs over something that does not meaningfully improve the portfolio.

Missing Major Parts of the Energy Sector

The final structural issue with XEG is that it is not a comprehensive representation of the Canadian energy sector. The index focuses almost entirely on upstream and integrated oil producers. It completely excludes a large group of important midstream energy companies.

That means companies such as Enbridge (ENB), TC Energy (TRP), Pembina Pipeline (PPL), and Keyera (KEY) are missing from the portfolio entirely. Considering how central pipelines and infrastructure are to Canada’s energy system, that omission makes little sense.

A Better Canadian Energy ETF Alternative

A far more sensible option, in my opinion, is the Global X Equal Weight Canadian Oil and Gas Index ETF (NRGY). The fund tracks the Mirae Asset Equal Weight Canadian Oil and Gas Index, which includes the largest and most liquid Canadian energy companies.

The equal-weight methodology also works well in a narrow sector like energy. Instead of letting a few mega-producers dominate the portfolio, each company receives the same weight. That creates a built-in buy-low, sell-high effect during rebalances and avoids the massive concentration seen in XEG.

NRGY is also far cheaper. As of June 30, 2025, the ETF has a 0.27% MER and a 0.02% trading expense ratio (TER). Combined, that is still less than half the cost of XEG. For investors looking for Canadian energy exposure, that alone makes it worth serious consideration.