Backdrop

First, on the supply side, I see constraints. There are continuing Russia-Ukraine tensions and the fallout that could ensue from any escalation could be major. Russia is a huge oil exporter. If there’s any hindrance to supply, the global price of oil will rise. In terms of gas, Russia is also a major supplier of gas to central Europe and vast quantities are carried through Ukraine. Any kind of supply problem may now have a global rather than just a European impact. This is because the US is now talking about helping Europe with any shortages by exporting tankers of its own gas reserves.

Second, I expect increasing demand this year. I think world economies will move towards opening fully as we put the Omicron variant of Covid behind us. Hopefully, as we get back to normal, travel and tourism numbers will improve, commuting will increase and generally the demand for oil will rise.

The ETF

The ETF I’m looking at aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index. I think this fund offers me the best opportunity to take advantage of rising commodity prices.

This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development around the world. The companies must also meet liquidity and market capitalisation requirements to be included.

Looking into some of the holdings reveals some heavyweight natural resources companies. The two biggest holdings are ConocoPhillips and EOG Resources. The former is Alaska’s largest crude oil exploration and production company. The latter is involved in oil discovery and processing.

One risk to be aware of for this ETF is that in 2021 we saw a push by governments around the world towards clean energy. It’s possible investors might continue to turn away from traditional energy companies and direct money towards the renewables sector. This would likely be negative for the fund.

Outlook

But overall, I’m optimistic. The profits of the companies in this ETF rely heavily on the price of oil and gas. As prices rose in 2021, the fund’s price increased by over 70% and year-to-date it’s already up 10%.

Though nothing is certain, I think the prices of natural resources will rise again this year. In fact, I think oil could hit $100 a barrel. Looking back at 2014 when oil prices were last at this level, the fund was trading at over 1,900p. If we get there again, this would mean an increase of over 30% from where we are today.

For that reason, I think that for my own portfolio, iShares S&P Commodity Producers Oil & Gas UCITS ETF could be a no-brainer buy for 2022.

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.

In fact, at the time of writing, iShares Oil & Gas Exploration & Production UCITS ETF (LSE:SPOG) is the best-performing ETF of the year.

The ETF

I’ve always been a fan of ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.

This particular ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.

This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. The companies must also meet liquidity and market capitalisation requirements to be included.

Quite simply, this fund has had a phenomenal year. Year to date the fund has increased by over 70% and over 12 months the performance is similar.

Looking into some of the holdings reveals some heavyweight natural resources companies. The two biggest holdings are ConocoPhillips and EOG Resources. The former is Alaska’s largest crude oil exploration and production company. The latter is a Fortune 500 company headquartered in Texas. Both firms are in the oil discovery and processing business with operations in the US, Middle East, Europe, and Asia.

Canadian Natural Resources, is the third-largest holding in the fund. It’s one of the biggest independent crude oil and natural gas producers in the world.

Should I invest?

The increase in the share price of this fund is ultimately because of the rise in the value of oil and gas. As the world has come out of lockdowns, soaring demand combined with surging business activity has rapidly increased energy prices.

However, the 2022 price outlook for these commodities is far from certain. On one hand, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. However, according to an S&P report, the price of oil should stabilise in 2022. On balance, I think that the price of oil and gas in 2022 will be largely determined by Covid variants and possible lockdown restrictions. A surge in the new Omicron variant, identified by the World Health Organisation as potentially very high-risk, has already seen the price of oil fall.

For this reason, despite this being the best-performing ETF of the year so far, I’m happy to wait and see what happens to energy prices in 2022 before adding it to my own portfolio.