• 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.

I’m now looking at two ETF picks for my portfolio that could have fantastic growth prospects for 2022.

Pick 1

iShares S&P Commodity Producers Oil & Gas UCITS ETF (LSE:SPOG). The oil and gas sector rallied strongly last year. This particular fund was one of the best performing ETFs of 2021 in that area, increasing by around 70% during the course of the year.

The iShares S&P Commodity Producers Oil & Gas UCITS ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.

This measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. US and Canadian energy giants dominate the index, comprising almost 80%. There are five companies from the UK on the list, but these represent less than 2% of the overall holdings.

The fund is already performing well this year, up by 12% year-to-date. Although nothing is certain in investing and a fall in energy prices will certainly hurt this ETF, it’s now looking probable that the price of oil is set to rise. This is likely to have a further positive impact on the earnings of these companies. If this trend in energy prices continues, it’s likely iShares S&P Commodity Producers Oil & Gas UCITS ETF will have another fantastic year.

Pick 2 

iShares FTSE 100 (LSE:ISF). In 2021, the FTSE 100 posted its best year since 2016. Looking ahead into 2022, I’m feeling bullish about the Footsie again.

Within my own portfolio, I’ve owned iShares FTSE 100 for some time now. I think it offers me the best access to the FTSE 100 as a whole since it allows me to own all the companies in the index by just holding one share.

Over 12 months, this ETF has increased by around 11%. However, despite a strong start to the year, at the time of writing it has seen a pullback and is currently sitting about flat for the year. This shows that there are headwinds for the FTSE 100 and therefore this fund. Continuing supply-side disruptions and rising interest rates could weigh on possible returns.

However, I’m generally optimistic about iShares FTSE 100 for two main reasons. First, we have some of the highest Covid vaccination rates in the world. As our economy fully opens up, the earnings of these companies should rise. Second, the index is rich in firms operating in sectors that could surge this year such as banking and energy.

For example, HSBC has already seen an increase in its value this year. If interest rates rise further in response to higher inflation, then its share price should benefit. Similarly, BP has also had a good start to the year and if energy prices continue to rise, this should translate into higher earnings.

On balance, I think that this ETF could deliver sizeable gains for my portfolio over the coming year.

But there’s also a large opportunity cost by keeping my savings in a bank as interest rates are so low. By contrast, investing my money in shares can lead to inflation-beating returns. Here’s how I’m planning my next £1,000 investment as I look ahead in 2022.

A FTSE 100 index tracker

Of course, I could use a passive investment like the iShares Core FTSE 100 ETF (LSE: ISF). This is a fund that aims to track a stock index, such as the FTSE 100 here. There’s no risk of a fund manager picking the wrong stocks with such tracker investments. But on the downside, I’m also not going to outperform the FTSE 100 index if I choose this option.

This ETF is up 13% over one year though, and has a 12-month dividend yield of 3.8%. I’ll also be diversified across 100 stocks if I invest my £1,000 in this ETF.

Nevertheless, returns for the FTSE 100 are never guaranteed, and the index could fall this year. It’s best to have a view on the index before using a passive strategy such as this.

Growth and income stocks

Today, my portfolio is diversified across a number of stocks. So this year I’ll look to add more using that £1,000 investment. My preferred strategy is to buy companies with strong prospects for growth in the years ahead. Auto Trader and JD Sports are expected to grow earnings by 86% and 69%, respectively, in their upcoming full-year results. Rightmove is another company with attractive growth potential as the UK housing market is booming right now.

But I also like diversifying my portfolio with income stocks. These are investments in companies that generate above-average dividend yields. They may not offer the best growth potential, but they can be a great way to increase my passive income stream. I’ll look to invest part of my £1,000 in Legal & General and Vodafone as these companies have achieved some of the highest 10-year average dividend yields in the FTSE 100. This shows me that the dividends from these companies have been dependable over the years. I also like the look of Aviva as it’s planning on returning significant cash to shareholders in the months ahead.

It’s important for me to keep in mind that any of my investments can decline in price, so it’s good to keep at least some savings aside. Nevertheless, long-term investing using these ideas can be a great way for me to build wealth.

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.

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. I believe that because a FTSE 100 ETF offers me access to all the companies in the index, this could be the best approach for me.

There’s a lot of choice when it comes to a FTSE 100 ETF. Most, if not all, of the major investment companies offer a fund. In selecting a fund there are a variety of strategies, however, I usually consider the three factors that are most important to me. That is, fund size, expense ratio, and whether I want dividends or not.

The fund I’ve selected for my own portfolio is iShares FTSE 100 (LSE: ISF). By fund size it’s the biggest with over £10bn. It’s also among the cheapest, with an ongoing charge of 0.07%.

Finally, this fund pays a dividend. One of the major plus points of the FTSE 100 is that there are so many established, large companies in the index that can pay dividends. Although there is a choice of whether to have the accumulation option or the dividend-paying option of this ETF, for my own portfolio I choose the latter option every time. Currently, the dividend yield is 3.71%.

Is the Santa Claus rally real?

Lots of research show that the Santa Claus rally does exist. Theories to explain it include increased Christmas shopping and institutional investors settling their books before going on holiday over the festive period.

However, it could just be a coincidence and it might not happen this year.

This December the markets have some clouds over them. The Omicron variant of Covid is, sadly, spreading faster than first thought. This could impact Christmas spending. Additionally, worries about inflation and rising interest rates could keep wallets firmly shut.

That said, I can’t help thinking that the specialty retailers like Burberry Group, Next, and JD Sports will do well over this festive period after the subdued Christmas we had last year. As will the big UK supermarkets like Tesco and Sainsbury.

In any case, Santa rally or not, I’m still comfortable holding a small allocation of iShares FTSE 100 among my holdings as part of a diversified portfolio.

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. 

This is how I could aim to generate £1,000 in passive income each year using dividend stocks in my ISA.

£1,000 in passive income

I’ve chosen a target of £1,000 as it would give me some extra spending money over the year. Eventually though, I want to grow this to be much larger. I’ll explore how to do this at the end of the article.

Now I need to make some assumptions. The £1,000 target depends on the dividend yields I can achieve from my investments. Luckily for me, the UK market is generally considered a good place to invest to generate dividend income. For example, the current 12-month dividend yield of the FTSE 100 is 3.6%, while the US equivalent index, the S&P 500, is only 1%.

To achieve £1,000 in passive income each year, a 4% dividend yield means my portfolio must be £25,000 in value. In a similar way, a 5% dividend yield requires a portfolio value of £20,000. A £20,000 portfolio is a great target to have because that’s the annual stocks and shares ISA allowance.

Now I have a goal to reach if I want to generate £1,000 in passive income.

Stocks with high dividend yields

At time of writing, there are 22 stocks in the FTSE 100 with dividend yields that are 4% or above, and 16 stocks with yields of at least 5%.

If I went with the larger dividend yield target of 5%, then I could buy all 16 stocks in my portfolio and equal weight them at £1,250 per holding. This would total the £20,000 portfolio value I would need to generate at least £1,000 in passive income.

I also have to remember that I’d incur dealing costs too, of course, and that a 16-stock portfolio might be considered too risky given the concentration in each position. If I chose the 4% dividend yield stocks, I would need a portfolio value of £25,000, and each position would be £1,136 in size. This spreads the risk across 22 stocks instead.

Final thoughts

The analysis here did not go deep enough into the companies themselves. This would be important to do before buying any of the stocks in my portfolio.

Therefore, another strategy could be to simply buy the iShares FTSE 100 (LSE: ISF) ETF, which tracks the entire index and generates a dividend yield of 3.6%. My portfolio value would have to be about £28,000 in this case, but at least the portfolio would be diversified across 100 stocks and buying one stock only would cut my dealing costs.

Over time, I’d want to increase my passive income above £1,000 by using dividend stocks. The way I would do this is by setting up a direct debt each month of £100 and automatically investing it into my ISA. This way, I’d have saved an extra £1,200 each year, which would then earn extra dividends in my portfolio.

What I am thinking

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. My thinking is that because a FTSE 100 ETF offers access to all the companies in the index, this could be the best approach for me.

The FTSE 100 is the index of the largest 100 companies by market capitalisation listed on the London Stock Exchange. It’s comprised of several sectors and I think there are a couple that would undoubtedly benefit from an increase in Black Friday spending. Specifically, the consumer discretionary and consumer staples components of the index are likely to see a boost.

Looking at the companies in these sectors is like a who’s who of UK retailing. For example, specialty retailers like Burberry Group, Next and JD Sports are joined by the big UK supermarkets like Tesco and J Sainsbury.

Selecting an ETF

Unsurprisingly, the FTSE 100 is well represented in the ETF world and there is a myriad of choices. Most, if not all, of the major investment companies offer a fund. Though other investors may think differently, I look at making my choice based upon the three factors that are most important to me. That is fund size, expense ratio and whether I want dividends or not.

The fund I am looking at is iShares FTSE 100 (LSE:ISF). By fund size, it is the largest by a mile with a size of over £10bn. It is also the cheapest with an ongoing charge of 0.07%.

The expense ratio is worth mentioning further. As there is so much competition in this space, the costs are low. The FTSE 100 ETFs are some of the lowest-cost funds in the UK and many of the funds from different investment companies also have the same low ongoing charge as this.

Finally, this fund pays a dividend. One of the major benefits of the FTSE 100 is that there are so many mature large companies in the index that can pay dividends. Although there is a choice of whether to have the accumulation or dividend-paying option of this ETF, for me I take the dividend option every time. Currently, the dividend yield is 3.71%.

Should I buy it now?

Although others may disagree with my choice, I am a big fan of this ETF. However, all things considered, I think there might be better options for me to take advantage of the inevitable uptick in sales from Black Friday this year. Online sales are likely to rise as a proportion of spending over the weekend. I can’t help thinking that investing in some pure e-commerce or technology firms might be a better bet.

Vanguard S&P 500 UCITS ETF (GBP) (LSE:VUSA)

The first ETF I would like to hold in my Stocks and Shares Lifetime ISA is one that tracks the S&P 500. This is a collection of 500 US shares known as an index. The index is designed to track the performance of all major industries in the US economy. The creator of this ETF, Vanguard, aims to pool all the investors’ money together and use it to buy these 500 shares. The performance of this ETF will rely on the combined return of all 500.

Due to the strength of the US economy, the relative stability and the strong legal system that allows companies to protect their property, it has had a good return historically. Between 1957 and 2018 its annual return averaged 8%, and I think something similar should be able to continue. This is also helped by the US’s dominance in tech. This ETF seems like a good choice for steady growth of my Lifetime ISA.

Vanguard FTSE All-World UCITS ETF (LSE:VWRL)

This ETF is another index tracker fund like the last. The difference here is that instead of aiming to track the performance of the US economy, this ETF follows the FTSE All-World index, which aims to track the performance of the entire world economy. However, there is more exposure to the US (55.8%) than other countries. Thus, bad performance of the US economy would affect this ETF significantly. That said, this index still offers me the opportunity to benefit from the overall growth of the world economy. I would view this ETF as safer than the S&P 500 ETF because it does not rely on only one country’s economy, which can be affected by political decisions or national disasters. It also offers 11.6% exposure to emerging markets, which can potentially allow for greater growth, although they can be riskier than developed markets.

iShares Core FTSE 100 UCITS ETF (LSE:ISF)

The last ETF that I’d like to mention is an FTSE 100 index tracker. This tracks the performance of 100 companies listed on the London Stock Exchange with the highest market capitalisation. I picked this because I think that in the next few years it will experience good returns. Brexit uncertainty is shrinking, and the London Stock Exchange has some exciting new listings such as Trustpilot on 23^rd of March, and Deliveroo is preparing to go public in a highly anticipated IPO. I hope that new interest in London shares may help to give the FTSE 100 a boost. However, the next years could be bad for the UK economy; if so, this ETF probably wouldn’t perform very well.

It is the latest investment bank to become bullish on the UK. On Tuesday, Goldman’s portfolio strategy team published a note titled “Why the UK is a buy”, advising their clients to buy the UK stock market.

Although Brexit negotiations are taking longer than anticipated, analysts at Goldmans believe that a last minute deal will be struck with the European Union. The bank also believes that the UK will experience a sharp economic recovery in 2021. This, in turn, should support UK domestic stocks.

Bullish on UK shares

I do not think it surprising to see Goldmans turn bullish on UK stocks. UK shares are looking cheap these days. At time of writing, the FTSE 100 and FTSE 250 indexes have fallen by 15% and 10% in 2020, respectively.  

Many of the blue-chip companies that make up the FTSE 100 derive their earnings overseas. As a result, sterling impacts the performance of this index. The FTSE 250 offers a more UK-centric performance, as most companies derive their revenue domestically.

Recovery in 2021

Goldmans believes that the UK is well placed with regard to the Covid-19 vaccine distribution. The bank expects widespread distribution of the vaccine across Europe in the first quarter of 2021. This would result in a large portion of the population being vaccinated by the end of June.

Goldman’s economists expect UK growth of 7% in 2021 and 6% in 2022. This is significantly above the consensus view. While I believe UK shares are cheap, I am not as optimistic as Goldmans. I think UK shares are still likely to be volatile as the economy recovers from the global pandemic.

Other banks

Goldman Sachs follows other banks who have recently turned positive on the UK market. Morgan Stanley has made the UK stock market its key investment call for 2021.

Citi recently told its investors to consider making a short-term “aggressive” bet on UK shares. UBS has a price target of 6,800 for the FTSE 100 by June 2021. Its analysts consider the UK as its most preferred stock market.

My view

While I could add the iShares Core FTSE 100 and iShares FTSE 250 ETFs to my portfolio, I think it is too early to be buying UK shares.

Covid-19 has hit the UK stock market hard. The large fall means that UK shares have more headroom to recover that other international stock markets such as the US, which have fared better through the pandemic.

Although the UK stock market has recovered from its lows in March, I believe there is still a large amount of uncertainty. Vaccines are likely to be rolled out next year but given the UK government’s past performance I don’t think this will be a smooth distribution. A Brexit trade deal has still not been agreed, which makes me nervous. On this basis, I expect the UK stock market to fall from its current levels and I will be buying on the dips.