As the world has come out of government-imposed lockdowns, a combination of soaring demand and surging business activity has rapidly increased energy prices. As oil and gas prices have rallied, I am now asking myself how to best take advantage of the rising profits of energy companies.
Drilling down into the fund
I have always been a fan of ETFs (exchange-traded funds) as they allow me to invest in multiple companies in a single fund and are usually low cost. An ETF 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 an energy ETF offers access to energy companies without me picking the shares myself, this could be the best approach for me.
The ETF I have been looking at is iShares S&P 500 Energy Sector UCITS GBP ACC (LSE: IESU). This ETF aims to track the S&P 500 Capped 35/20 Energy Index, which represents the energy sector of the S&P 500 Index but is cap-weighted to promote diversification. The largest holding is capped at 33% and all the other holdings are capped at 19%.
The ETF is diversified in terms of holdings with 21 companies in the fund. As you’d expect of a US energy focussed fund, some of the major holdings are big household names in oil such as Exxon Mobil Corp and Chevron Corp.
Looking beyond company diversification to other fundamental measures, it still looks attractive. It’s one of the largest ETFs in this sector (with assets over $700m), it has very low ongoing fees, and has been around since 2009.
Now for the good stuff. In the last 12 months, this ETF has increased by almost 85%! Enough said.
Should I invest?
At the outset, the 12-month outlook for this fund looks good.
Vaccine rollouts should hopefully keep the world economy free from lockdowns helping to keep demand for energy strong. Indeed, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. Such an increase would see the oil price rallying further, with some forecasting that it could go as high as $100 a barrel next year.
However, nothing is certain. Some commentators think that the upside potential to some of these energy companies might have already been priced in. Also, the big energy companies are definitely going to have to spend billions of dollars to reduce their dependency on fossil fuels and grow their focus on renewables. In the short run, this will definitely hurt their bottom lines.
Finally, it’s worth me thinking about this fund’s performance before 2021 and also beyond 2022.
Examining the performance of the fund over the last five years, the case for me to invest is not so clear. An investment over that period would have resulted in a loss of around 5%. Looking beyond 2022 and the inevitable shift to renewable energy, there are no guarantees that the companies in this fund will come out on top.
Therefore, although the return over the last 12 months is compelling, there is too much uncertainty for me to invest right now.
