The worst exchange of fire between the U.S. and Iran since July, as cited by Reuters, is putting energy and defense ETFs back in focus as intensifying hostilities raise the risk of prolonged disruptions to global oil flows through the Strait of Hormuz.
October WTI crude was up 0.48% at around $89 on Wednesday, reaching a fresh six-week high. Crude climbed as U.S. strikes on Iran’s southern coast and Iranian missile and drone attacks on U.S. bases across the Middle East have heightened fears of a wider energy supply shock.
The move puts the United States Oil Fund (NYSE:USO) and United States Brent Oil Fund (NYSE:BNO) among the most direct ETF beneficiaries if geopolitical risk continues to push crude higher.
Hormuz Remains the Key Oil-Market Risk
The Strait of Hormuz is central to the market’s response. While the U.S.-Iran escalation has raised concerns about a blockade or disruption, Energy Secretary Chris Wright said more than 17 million barrels of oil passed through the strait on Monday, according to Reuters, suggesting flows have not yet been shut down.
That has limited crude’s gains and highlights the market’s key tension. The longer the strait remains open, the harder it becomes for geopolitical fears alone to sustain a large oil premium.
Still, the U.S. military’s strikes on Iranian radar systems and mine-laying capabilities, combined with Tehran’s retaliation, raise the possibility of further disruption. Trump has also said the U.S. naval blockade of Iranian ports is putting pressure on Tehran and that he has no timeline for ending the conflict.
The broader Middle East picture adds to the risk. New Israeli strikes on Iran-backed Hezbollah in Lebanon and Hamas in Gaza, along with Houthi attacks on ships in the Red Sea and reported attacks on vessels around Hormuz, increase the potential for a prolonged regional conflict.
A Tightening Global Supply Backdrop
Oil’s bullish case is also being reinforced by supply concerns outside the Middle East.
The International Energy Agency has warned that global inventories could decline more than double its previously projected rate in the third quarter because of disruptions linked to the U.S.-Iran war, even as high prices and weaker economic activity weigh on demand.
Russia is another potential pressure point. Ukrainian drone attacks have repeatedly targeted Russian refineries, tankers and pipeline infrastructure. Russian crude runs fell below 4 million bpd in July, the lowest in more than two decades, per S&P Global. Meanwhile, Russian crude production fell to 8.89 million bpd, according to the International Energy Agency (IEA) oil market report.
That supply backdrop strengthens the case for the Energy Select Sector SPDR Fund (NYSE:XLE), alongside USO and BNO.
Defense ETFs Gain a Second Catalyst
The escalation is also supportive for defense ETFs such as the iShares U.S. Aerospace & Defense ETF (BATS:ITA) and Invesco Aerospace & Defense ETF (NYSE:PPA).
Continued U.S. military operations, weapons consumption and the prospect of prolonged Middle East tensions could reinforce expectations for higher defense spending and replenishment of munitions.
The other side of the trade is the airline industry. The U.S. Global Jets ETF (NYSE:JETS) could face pressure if crude and gasoline prices remain elevated, creating a direct margin headwind for carriers.
Hormuz and broader supply risks favor oil and energy ETFs, while escalating military spending is supporting defense funds, forming the emerging trade for ETF investors. Airlines face the opposite pressure if the crude rally persists.
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