Disruptive Theme of the Week: ETF Ramifications of the Iran War

Since the start of Operation Epic Fury at the end of February, Brent crude oil prices have risen as high as $150 a barrel as the Strait of Hormuz has been effectively closed by Iran.  Panic over supply is driving energy prices higher, and consumers are experiencing it at the pump with soaring gasoline prices.  From a macroeconomic perspective, markets are concerned that interest rate cuts are off the table due to rising inflation concerns. This has created both threats and opportunities for investors.Gold No Safe HavenNormally, in times of geopolitical turmoil, investors can rely on gold as a safe haven.  But after a 2025 run of 65% for LBMA Spot Gold, gold was a crowded trade leading to a liquidity driven sell-off YTD.  Physical gold prices have declined more than 11% since the start of the war, driving physical gold ETFs such as the SPDR Gold Shares (GLD B), GraniteShares Gold Trust (BAR ), and abrdn Physical Gold Shares ETF (SGOL) down in tandem. Gold miners, which are even more leveraged to gold prices due to their fixed operating costs, fared even worse with the VanEck Gold Miners ETF (GDX B+) and Sprott Gold Miners ETF (SGDM B-) down as much as 18% and 17.4% respectively.  Amid the turmoil, Goldman Sachs just reaffirmed its bullish gold thesis and price target of $5,400 an ounce by year end. But despite a long-term positive outlook, gold has been no safe haven during this conflict as rising oil prices have competed with gold for liquidity and higher interest rates have dulled gold’s glitter. Read more: Disruptive Theme of the Week: Some Surprise Winners YTDTraditional Defense Has Been Little DefenseLogically, during times of war, defense stocks seem like the place to be.  This is especially the case given the proposed U.S. defense budget for 2027 of $1.5 trillion, representing a massive 40%+ increase in spending.  While traditional defense ETFs like the Invesco Aerospace & Defense ETF (PPA A-) and the First Trust Indxx Aerospace and Defense ETF (MISL B+) have beaten the broad market YTD, up 8.9% and 7.7%, those returns seem muted considering there is an active on-going conflict. Clearly, defense technology is the hotter, more relevant category as cheaper technologies like drones and AI-enabled autonomous solutions are becoming the future of defense and target of future defense budgets. The more tech-focused GlobalX Defense Tech ETF (SHLD ) is up 14.1% YTD. Drone technology and anti-drone warfare have been a strategic gamechanger in the conflicts in Iran and Ukraine. The REX Drones ETF (DRNZ) is up 15.2% and the Defiance Drone and Modern Warfare ETF (JEDI) has gained 14.5%, as plays on this thematic trend.Specialized Energy PlaysWhile rising energy prices have lifted the returns of traditional energy ETF plays such as the Energy Select Sector SPDR (XLE A), up 35.4% YTD, there are other target energy plays worthy of attention.  First up is the ETF that is having its watershed moment, the Amplify Breakwave Tanker Shipping ETF (BWET C+). The ETF is designed to reflect the daily price movements of an index tracking the future cost of transporting crude oil. BWET offers investors unlevered exposure to oil tanker futures without the need for a futures account. It is up a whopping 630% for the year. Three other specialized plays on rising oil prices are the United States ETFs: the United States Oil Fund LP (USO B), United States Brent Oil Fund LP (BNO A), and United States Gasoline Fund LP (UGA B-), all of which provide exposure to oil and gasoline futures contracts. USO tracks WTI oil futures and is up 100% YTD, BNO tracks brent crude oil futures, gaining 93%, and the UGA gasoline futures fund is up 73% this year. Another unique ETF play on the Middle East energy crisis has been the Invesco DB Energy Fund (DBE A), an index-based ETF that tracks energy commodities. DBE is up 63% YTD. For those looking for option income along with commodity exposure, there is the Defiance Oil Enhanced Options Income ETF (USOY ) which has returned 63% YTD and has an annual distribution rate of 54.6%. USOY uses an at-the-money or in-the-money put selling strategy to provide income and exposure to the price of the USO.More Mainstream Energy PlaysWhile it is exciting that all these specialized energy plays are available in an ETF wrapper, some investors might be willing to forego some return for mainstream energy stock exposure.  In that category there are the Invesco Oil & Gas Services ETF (PXJ C) and the Texas Capital Texas Oil Index (OILT ) up 42.6% and 42.5% YTD. Oil is not the only commodity being disrupted in the Strait of Hormuz. Chemical and fertilizer stocks are also benefiting from shortage-related higher prices.  The Amplify Energy & Natural Resource Covered Call ETF (NDIV ) recently added a covered call income overlay and offers exposure to both energy and natural resources stocks such as chemical producers Dow and LyondellBasell.  The ETF is up 34.8% for the year and has a monthly distribution rate of 10.16%.ConclusionInvestors will have to decide how long these trends will persist post a resolution to the conflict. However, as we learned from the pandemic, supply chain disruptions do not resolve themselves overnight and spending shifts can play out over a long period of time.  Will high gas prices reinvigorate the market for electric vehicles?  Will the health of the consumer become an issue in a prolonged conflict?  Those are more disruptive ETF themes to ponder another time. For more news, information, and analysis, visit our Disruptive Technology Content Hub. VettaFi LLC (“VettaFi”) is the index provider for DRNZ, OILT, and NDIV for which it receives an index licensing fee. However, DRNZ, OILT, and NDIV are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of DRNZ, OILT, or NDIV.