I’m largely optimistic about the FTSE 100 going into 2022. The UK has one of the largest economies in the world and one of the highest Covid vaccination rates. In October, the IMF projected that UK economic growth would be 5% in 2022, which is among the highest in the developed world. This sets the backdrop for what could be a good year for the FTSE 100.
The flagship UK market index has underperformed many others in the developed world. However, with a low price-to-earnings (P/E) ratio and good dividend yield, 2022 might be time for the Footsie to surge.
Within the FTSE 100 there’s exposure to some world-class companies across several sectors. I think in particular pharmaceuticals and energy are likely to see a boost next year. For example, GlaxoSmithKline has had a good year in 2021. It is up around 15% year-to-date and 13% year-on-year.
BP has had a strong year too, seeing a rise in its stock of over 36% and 27% year-on-year. I can see oil prices rising in 2022, which could lead to a further uptick in BP’s shares.
The ETF
I like these shares, but I’m aware that individual stock picks always come with risk. For my portfolio, I prefer to diversify to try to reduce that risk and invest in the FTSE 100 via an exchange traded fund (ETF). An ETF is a fund that tracks an index or sector, is usually low-cost and can be bought and sold like a share through most online brokers.
Most, if not all, of the major investment companies offer a FTSE 100 ETF and I’m spoilt for choice. I look at making my choice based on three factors: fund size, expense ratio and whether I want dividends or not.
The fund I’m interested in is iShares FTSE 100 (LSE:ISF). By size, it’s the biggest,at over £10bn and it’s the cheapest too, with an ongoing charge of 0.07%.
Although there’s a choice of whether to have an accumulation option (where my dividends are reinvested) or a dividend-paying option with this ETF, I prefer the income stream of the latter. Currently, the yield is 3.71%.
It’s also worth mentioning that this fund is consistently one of the most popular ETFs by trading volume in the UK.
The risks
There will continue to be lots of risks in financial markets in 2022. A new Covid variant could easily cause a downturn as we briefly saw with the Omicron variant. A rise in interest rates could be a further catalyst for a crash.
Also, by investing in iShares FTSE 100, I’ll only get the market performance of the index, rather than the chance to outperform the market by picking individual stocks.
However, I hope that if I include this exchange traded fund in my holdings as part of a balanced portfolio, I can get good rewards next year.