How I’m trying to profit from rising energy prices by investing in oil and gas shares

This year is going to be financially tough for many families. There is already talk of a cost-of-living crisis due to an increase in the energy price cap in April. In fact, my wife and I calculate that we are going to be around £400 a year worse off. However, I might be able to profit from soaring energy costs by investing in oil and gas shares.  

An oil and gas ETF

There are a few different ways to do this. I could invest in individual energy companies, for example. But for my own portfolio, I’ve always been a fan of exchange-traded funds, or ETFs.

The ETF I’m interested in is iShares S&P 500 Energy Sector UCITS GBP ACC (LSE: IESU). This allows me to invest in large US oil and gas companies by just holding one share that is listed on the London Stock Exchange.

This was a very high-performing fund last year, increasing by over 55%. Though the past is no guarantee of the future, this may be a good place for me to start looking for potential gains.

This exchange-traded fund aims to track the S&P 500 Capped 35/20 Energy Index, which represents the energy sector of the S&P 500 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 like Exxon Mobil Corp and Chevron Corp. 

The profits of the companies in this fund are heavily dependent on the price of oil and gas. If they continue to soar, then this ETF might see a significant price increase.

Is there still an opportunity to profit?

Despite the phenomenal returns during 2021, there are some questions marks about this ETF going forward. First, some commentators think that the upside potential to some of these firms might have already been priced in last year. Second, 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.

That said, overall, I’m optimistic. Vaccine rollouts should hopefully keep the world economy free from lockdowns, which will help 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.

This ETF has already increased by around 17% year-to-date, buoyed by the price of oil reaching $90 a barrel. If black gold hits $100 this year, as some commentators think, then iShares S&P 500 Energy Sector UCITS GBP ACC should rise even further.

On balance, this ETF seems a good way for me to invest in oil and gas shares and try and profit from rising energy prices. I would be happy to consider adding this to my own holdings as part of a balanced portfolio. 

Niki Jerath does not own any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.