The best direct investment plays in the oil sands - DAVID PARKINSON

WHAT ARE WE LOOKING FOR?

As this week's Shifting Sands special report in The Globe and Mail has illustrated, the Athabasca oil sands of northern Alberta represent not only the future for the Canadian energy industry, but also one of the biggest potential sources of growth for the entire Canadian economy. At the same time, Canada's conventional oil and gas production is in its twilight years in this country.

The S&P/TSX capped energy index does give investors significant exposure to the oil sands story, but investors who buy the index also get a lot of stocks that are bulked up on fading conventional fields, not to mention drilling and oil field services companies, that in most cases, have, at best, only a tangential connection with the oil sands. We wanted to cut through the chaff and identify the best direct investment plays in the oil sands - stocks that offer the most pure exposure to future growth in this vast and internationally important oil reserve.

Fortunately, someone has done it for us.

THE CLAYMORE OIL SANDS ETF

Claymore Investments Inc., the Toronto-based fund management company, launched an exchange-traded fund called the Claymore Oil Sands ETF in the fall of 2006 - back when the price of crude was a mere $60 (U.S.) a barrel. The ETF is based on the Sustainable Oil Sands Sector Index, created in 2004 by Derek Gates, president of Calgary-based index developer Sustainable Wealth Management Ltd.

The index focuses on Canadian energy companies that are active producers in the oil sands and, more importantly, are expected to significantly increase their oil sands production over the next 10 years.

Stocks eligible for the index must have a minimum $500-million (Canadian) market capitalization at the time of the index rebalancing, which takes place once a year (in June). But market cap is only a small factor in determining weightings for the stocks within the index.

The main criteria in determining the stocks' index weightings relate to production levels. The index and ETF are tilted toward stocks with the highest current oil sands production, the highest projected oil sands production 10 years from now, and the highest proportion of their total production coming from oil sands. Measures for liquidity and market cap are also taken into account, but they are relatively small factors in the weighting formula, said Claymore president Som Seif.

HOW HAS IT DONE?

One- and three-year performance data show the oil sands-intensive stocks have, indeed, considerably outperformed the oil and gas sector as a whole.

In the 12 months ended Dec. 31, 2007, the Claymore Oil Sands ETF generated returns of 22.5 per cent - trouncing the S&P/TSX Capped Energy Index, which was up a modest 7.9 per cent in the year. Over the past three years, total returns for the Sustainable Oil Sands Sector Index - which predates the Claymore ETF by a couple of years - are 43.3 per cent, more than double the 20.5 per cent of the TSX energy group.