An oil and gas ETF

There are a few different ways to do this. I could invest in individual energy companies, for example. But for my own portfolio, I’ve always been a fan of exchange-traded funds, or ETFs.

The ETF I’m interested in is iShares S&P 500 Energy Sector UCITS GBP ACC (LSE: IESU). This allows me to invest in large US oil and gas companies by just holding one share that is listed on the London Stock Exchange.

This was a very high-performing fund last year, increasing by over 55%. Though the past is no guarantee of the future, this may be a good place for me to start looking for potential gains.

This exchange-traded fund aims to track the S&P 500 Capped 35/20 Energy Index, which represents the energy sector of the S&P 500 but is cap-weighted to promote diversification. The largest holding is capped at 33% and all the other holdings are capped at 19%.

The ETF is diversified in terms of holdings with 21 companies in the fund. As you’d expect of a US energy focussed fund, some of the major holdings are big household names like Exxon Mobil Corp and Chevron Corp. 

The profits of the companies in this fund are heavily dependent on the price of oil and gas. If they continue to soar, then this ETF might see a significant price increase.

Is there still an opportunity to profit?

Despite the phenomenal returns during 2021, there are some questions marks about this ETF going forward. First, some commentators think that the upside potential to some of these firms might have already been priced in last year. Second, the big energy companies are definitely going to have to spend billions of dollars to reduce their dependency on fossil fuels and grow their focus on renewables. In the short run, this will definitely hurt their bottom lines.

That said, overall, I’m optimistic. Vaccine rollouts should hopefully keep the world economy free from lockdowns, which will help to keep demand for energy strong. Indeed, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. Such an increase would see the oil price rallying further.

This ETF has already increased by around 17% year-to-date, buoyed by the price of oil reaching $90 a barrel. If black gold hits $100 this year, as some commentators think, then iShares S&P 500 Energy Sector UCITS GBP ACC should rise even further.

On balance, this ETF seems a good way for me to invest in oil and gas shares and try and profit from rising energy prices. I would be happy to consider adding this to my own holdings as part of a balanced portfolio. 

The post How I’m trying to profit from rising energy prices by investing in oil and gas shares appeared first on The Twelfth Magpie.

Drilling down into the fund 

I have always been a fan of ETFs (exchange-traded funds) as they allow me to invest in multiple companies in a single fund and are usually low cost. An ETF is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers. My thinking is that because an energy ETF offers access to energy companies without me picking the shares myself, this could be the best approach for me. 

The ETF I have been looking at is iShares S&P 500 Energy Sector UCITS GBP ACC (LSE: IESU). This ETF aims to track the S&P 500 Capped 35/20 Energy Index, which represents the energy sector of the S&P 500 Index but is cap-weighted to promote diversification. The largest holding is capped at 33% and all the other holdings are capped at 19%. 

The ETF is diversified in terms of holdings with 21 companies in the fund. As you’d expect of a US energy focussed fund, some of the major holdings are big household names in oil such as Exxon Mobil Corp and Chevron Corp.  

Looking beyond company diversification to other fundamental measures, it still looks attractive. It’s one of the largest ETFs in this sector (with assets over $700m), it has very low ongoing fees, and has been around since 2009. 

Now for the good stuff. In the last 12 months, this ETF has increased by almost 85%! Enough said. 

Should I invest? 

At the outset, the 12-month outlook for this fund looks good.  

Vaccine rollouts should hopefully keep the world economy free from lockdowns helping to keep demand for energy strong. Indeed, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. Such an increase would see the oil price rallying further, with some forecasting that it could go as high as $100 a barrel next year. 

However, nothing is certain. Some commentators think that the upside potential to some of these energy companies might have already been priced in. Also, the big energy companies are definitely going to have to spend billions of dollars to reduce their dependency on fossil fuels and grow their focus on renewables. In the short run, this will definitely hurt their bottom lines. 

Finally, it’s worth me thinking about this fund’s performance before 2021 and also beyond 2022.

Examining the performance of the fund over the last five years, the case for me to invest is not so clear. An investment over that period would have resulted in a loss of around 5%. Looking beyond 2022 and the inevitable shift to renewable energy, there are no guarantees that the companies in this fund will come out on top. 

Therefore, although the return over the last 12 months is compelling, there is too much uncertainty for me to invest right now. 

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