Last year, the FTSE 100 posted its best year since 2016 as UK stocks rallied from the Covid-induced lows of 2020. The increase of around 14% during 2021 was largely due to economies benefiting from stimulus measures from governments and central banks.
It closed just below 7,400 on New Year’s Eve and I think there’s a strong possibility that the index could head towards its May 2018 all-time high of 7,900 at some point in 2022.
First, we have some of the highest Covid vaccination rates in the world. Second, the flagship UK market index has underperformed many others in the developed world. Third, the index is rich in companies operating in sectors that could surge this year such as banking, pharmaceuticals, and energy.
The ETF
An ETF (exchange-traded fund) is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers.
For my portfolio, I think that an FTSE 100 index ETF offers me the best chance of participating in any rally since it offers me access to all the companies in the index by just holding one share.
There’s a lot of choice when it comes to a FTSE 100 ETF and the fund I’ve selected for my own portfolio is iShares FTSE 100 (LSE: ISF). By size, it’s the largest at over £10bn, It’s among the cheapest with an ongoing charge of 0.07% and is consistently one of the most popular ETFs in the UK.
One of the benefits of the FTSE 100 is that there are so many established, large companies in the index paying dividends. Although there’s a choice of whether to have the accumulation option or the dividend-paying option of this ETF, for my own portfolio I prefer the latter. Currently, the dividend yield is 3.71%.
The risks
The risks to this ETF reflect those to the FTSE 100 generally.
In my mind this is threefold. First, persistent inflation and any interest rate rises that could ensue. Second, supply chain disruptions still have the potential to hurt firms’ earnings. Finally, we are not out of the woods with Covid. Despite high vaccination rates, new variants could cause a downturn.
For 2022?
As Charlie Munger said in the 2021 Berkshire Hathaway shareholders meeting, “If you’re not a little confused by what’s going on, you don’t understand it”. That’s how I feel. There’s so much uncertainty out there, it’s difficult for me to position myself.
Despite this, I’m still largely bullish about this ETF and the FTSE 100 index as a whole, largely because of the wide diversity of sectors and companies included in the fund.
If interest rates rise, banking shares could do well. If commodity prices rise, miners and oil companies might rally. A further lockdown might see the supermarkets outperform.
Therefore, on balance, going into 2022 I’m still comfortable holding a small allocation of this ETF among my holdings as part of a diversified portfolio.