Key Points
- A stock market correction can be a nerve-racking time
- However, it can also present an opportunity to invest
- A dividend-paying FTSE 100 ETF is one way of trying to take advantage of a fall in share prices
A stock market correction is generally thought of as a 10% decline in an index. Though it can be nerve-racking to invest when there’s a big fall in the markets, for investors with a long-term time horizon, it can represent a buying opportunity. Indeed, for my own portfolio, I believe that a stock market correction can be the perfect time to put money into a FTSE 100 exchange traded fund (ETF).
A potential opportunity
The average stock market correction is usually short-lived and lasts only a couple of months. When share prices fall, this can present a chance to buy more stocks for the same amount of money I might have invested in a much smaller number previously.
The Footsie has had a great run over the last 12 months. However, it’s really only just getting back to pre-pandemic 2020 levels. As we move into February 2022, I’m still hopeful that the flagship UK index has some way to rise. This is for two main reasons.
First, I’m bullish on the UK economy as the UK has some of the highest Covid vaccination rates in the world. Second, the FTSE 100 is rich in companies operating in sectors that could surge this year, such as banking and energy. Banks tend to perform well when interest rates are rising. Energy firms are likely to benefit from rising oil and gas prices.
That said, the market jitters in January remind me that nothing is certain. Indeed, both inflation and supply chain disruptions still have the potential to hurt firms’ earnings. Also, the past is no guarantee of the future. Just because previous corrections have been short-lived, they might not be so in the future.
However, I think that a fall in the stock market could present an opportunity for me to take advantage of reduced UK share prices by investing money in a FTSE 100 ETF.
FTSE 100 ETF
There are a lot of choices when it comes to a FTSE 100 ETF. 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 it’s consistently one of the most popular ETFs in the UK.
One of the benefits of the Footsie is that there are so many established, large companies in the index paying dividends. Although I have a choice of whether to leave my dividends to be reinvested or to take the cash, for my own portfolio I prefer the latter. Currently, the dividend yield is 3.71%.
The issue with a sharp fall in stock prices, is that it’s impossible for investors to predict when the market will bottom with any kind of accuracy. However, the fact that this ETF pays a dividend means that even if the share price declines further, I should still be earning a return.
Although a stock market correction is unnerving, for my own portfolio, I would consider buying more of this fund if prices take a tumble.