How A Strait Of Hormuz Shock Could Ignite A Surge In Energy And Defense ETFs

The Strait of Hormuz, accounting for nearly a third of the world’s oil supply, is once again under geopolitical pressure, and ETF investors are rushing to reposition.

Over the past month, the United States Oil Fund USO and the United States Brent Oil Fund BNO have spiked 22.25% and 20.26%, respectively. On Saturday, the U.S. conducted airstrikes on three major Iranian nuclear facilities—Fordow, Natanz, and Isfahan—and oil prices jumped in response.

Now, energy experts are signaling a possible $100-per-barrel oil situation, particularly if Iran decides to respond by attacking U.S. interests in the Gulf or interfering with global trade through the Strait of Hormuz, according to Bloomberg.

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ETFs Riding The Risk Wave

If tensions further intensify, energy-oriented ETFs may keep rising. Preeminent tickers in consideration are:

USO and BNO – Already surging, they are bellwethers for sentiment on crude.

USO tracks front-month WTI crude oil futures. It is usually the first choice for traders seeking direct exposure to oil price changes. Because of its exposure to front-month futures, USO will be very volatile but also rapidly sensitive to geopolitical shocks such as airstrikes or naval interferences.

BNO reflects Brent crude, the global oil benchmark, and is most applicable when Middle East supply lines are in jeopardy. Brent will spike quicker than WTI in times of global crises, and BNO provides the retail investor with an accessible vehicle to access that.

Invesco DB Oil Fund DBO offers futures-based exposure with strong war-time tailwinds. It provides exposure to a longer curve of oil futures, making it less whiplash-prone than USO or BNO. DBO can be a more measured bet for investors who believe the conflict will lead to sustained price appreciation in oil.

SPDR S&P Oil & Gas Exploration & Production ETF XOP plays off the supply disruption theme using upstream producers. Instead of following oil itself, XOP puts capital in upstream energy producers, those that drill and explore for oil. As crude moves higher, the margins for these companies widen, making XOP a high-beta bet on the general energy uptrend. It is essentially a leveraged oil play, but without the leverage.

First Trust Natural Gas ETF FCG and United States Natural Gas Fund UNG—These ETFs may move if LNG through Hormuz is at risk. If LNG cargo through the Strait of Hormuz becomes disturbed, gas prices, particularly in Europe, may surge. Although these ETFs have not shown a positive reaction yet, they are under watch. FCG also provides equity exposure to U.S.-based natural gas producers, which would profit from Europe panicking for alternative suppliers.

But black gold isn’t the only one rallying.

Defense ETFs On Radar

As President Donald Trump warned Iran of further strikes unless it abandons its nuclear ambitions, some investors are rotating into defense ETFs amid escalating geopolitical risks.

iShares U.S. Aerospace & Defense ETF ITA invests in big-cap defense contractors such as Lockheed Martin LMT, Northrop Grumman NOC, and Raytheon RTX. These companies are at the forefront of any U.S. military buildup, either through the sales of hardware, missile defense systems, or support. As tensions rise, ITA is a favorite among investors who take an educated guess at sustained geopolitical uncertainty.

SPDR S&P Aerospace & Defense ETF XAR is more diversified than ITA. If defense spending increases and new contracts are awarded under wartime terms, XAR might see wider upside potential. It also performs better during times of high volatility because of its equal-weight approach.

Both these ETFs stand to gain as defense budgets swell and military contractors set up for more long-term involvement.

Geopolitical Wildcards

Although markets have factored in the initial attacks, doubt over Iran’s retaliation plan and Trump’s extended geopolitical strategy are making traders nervous. One wrong shipping lane missile could send oil above $110, according to Goldman Sachs, and ignite wider risk-off sentiment across equities.

For ETF traders, the secret is to position, not panic. This could be a good opportunity for tactical maneuvers in energy and defense funds. But in the era of tweet-induced volatility, one thing’s certain: ETFs are where the battle lines, and profits, are being drawn.

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