XAR SPDR S&P Aerospace and Defense

Although the economy may be rebounding, some significant risks to global growth remain. Beyond a debt crisis, arguably one of the biggest stems from ultra-high oil prices which could be brought on by more tensions in the Middle East, specifically from Iran. The Islamic Republic, which is boxed in by the U.S. and its allies on multiple sides, appears unwilling to back down from its development of nuclear materials, despite the protests from many in the West.

Sanctions and boycotts of Iran’s main export, crude oil, have had little impact in getting Iran to change its course and now some fear that more drastic measures may be taken in order to stop Iran from joining the club of nuclear powers. In fact, many analysts are predicting that Israel could strike at Iran’s nuclear facilities in order to prevent the regime from developing the capabilities to utilize an atomic weapon. If this happens, all bets are off as Iran could lash out and attempt to disrupt vital oil routes that are at the country’s doorstep in the Gulf, potentially throwing a wrench into the global economic recovery (see Inside The Forgotten Energy ETFs).

Given these rising tensions, some investors may want to position their portfolios accordingly or at least be aware of some possible winners if events with the country take a turn for the worse. With this in mind, we have highlighted three ETFs that could make for solid choices should the crisis with Iran reach a fevered pitch:

United States Brent Oil Fund (BNO)

Iran is currently one of the top five producers of oil and the third biggest exporter of the crucial commodity on the world stage. Beyond the key production from Iran, the country has threatened to close off the Strait of Hormuz if attacked, potentially crippling the global oil trade in the process. That is because nearly 20% of the world’s oil goes through the narrow pass, with fuel from many of the key oil producing Gulf nations traversing through this zone. In fact, by some estimates, close to 17 million barrels per day travels the Strait over every 24 hour period, or nearly the equivalent that is used by the United States on a daily basis.

If Iran’s massive oil production is bottled up thanks to embargos, and if the country retaliates by shutting down the Strait, oil prices will likely skyrocket in the process. While the ability of Iran to hold onto the zone for an extended period of time is certainly in question, any sort of delay in the flow of oil from this region could boost prices around the world. If this happens, a variety of oil-based ETFs will likely be huge winners but none as much as BNO (see Forget WTI, Play Crude With This Oil ETF).

This fund could be the big winner thanks to its focus on Brent oil futures as opposed to USO’s focus on WTI crude futures. WTI is more of a benchmark for American prices while BNO and Brent serve as a similar index for Europe and the Near East instead. Since Western Hemisphere production will not be impacted by an Iranian event, BNO is definitely the way to go for those seeking to make an oil play related to tensions in the region (read Time To Consider The Small Cap Oil ETF).

S&P Oil & Gas Exploration & Production ETF (XOP)

For investors who believe that there is going to be a bull market in oil thanks to the reasons outlined above, a closer look at the exploration and production sector could be warranted. If the worst happens in the Middle East it will only further spur investors to develop new fuel sources in friendlier and more stable nations, boosting demand for exploration and production equipment and services. This could turn out to be especially good news over the long term for those in the exploration side of the business as finding new fields will be of utmost importance although ways to increase production immediately will also be vital to the global economy, suggesting the broad sector will benefit. While there are currently three ETFs in the sector—IEO, PXE, and XOP—we have chosen to focus on XOP for this article as the fund is by far the most liquid and widely held with over one billion in total AUM (read A Closer Look At The Canadian Energy Income ETF).

The SPDR product tracks an index of all oil and gas companies that are in the S&P Total Markets Index, using a modified equal weight method to achieve exposure. This produces a fund of about 76 holdings in total with a gross expense ratio of a pretty low 35 basis points. Production firms make up about 75% of the total basket although refining & marketing (15.3%), and integrated oil & gas firms (8.5%) also receive decent weightings as well. In terms of individual holdings, Cobalt International Energy (CIE) takes the top spot, but it is closely trailed by Western Refining (WNR), Hollyfrontier (FTO), and CVR Energy (CVI)

Dow Jones U.S Aerospace & Defense Index Fund (ITA)

While there are two other quality options in the defense space—PPA and XAR—many investors focus in on ITA for its higher levels of liquidity and AUM. As a result, we will focus on this iShares fund for this article, although either of the other two funds in the space could provide similar exposure. In fact, all three could see increased interest if tensions continue to ratchet up with Iran and more military spending seems to be on the horizon. The prospect of increased purchases by a variety of governments could help to reverse the trend that many had built into the prices in some of these securities, potentially giving assets in this industry a nice pop should Iranian worries continue (read Three Industrial ETFs For A Manufacturing Revival).

The iShares fund tracks the Dow Jones U.S. Select Aerospace & Defense Index which consists of about 34 securities from across the broad industry.  Currently, the product is tilted towards aerospace firms although pure defense companies comprise nearly 42% of the assets as well. In terms of individual holdings, United Technologies (UTX) takes the top spot and is closely followed by Boeing (BA) although seven other firms make up at least 4% of the total assets in ITA. The product charges investors 47 basis points a year in fees but it does pay out a decent 1.1% 30-Day SEC Yield.

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Disclosure: Author is long ITA

 
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