Using Energy ETFs to Hedge Against Middle East Risks

March 7th at 3:30pm by Tom Lydon

Heightened geopolitical risk in the Middle East could cause investors to reduce their overall portfolio risk by shifting assets away from equities to cash and bonds. However, exchange traded funds that follow the energy sector may be a good way to hedge the potential risks.

Most of the troubles are focused around the Islamic Republic of Iran’s intent to develop nuclear technology in a way that contradicts its international treaty obligations, writes Aaron S. Gurwitz, CIO at Barclays Wealth, in a research note.

Some experts believe that Iran has no intention on building nuclear weapons and that Israel only wants Western countries to focus on the Middle East, specifically Iran.

“If these observations are correct, then geopolitical turmoil in the Gulf region may remain a source of volatility in financial markets but does not appear to present a clear and present danger to asset values,” Gurwitz said.

However, if Iran is developing nuclear weapons and we see a near-term military attack, the geopolitical risk in the Middle East North Africa region will raise oil prices, which would impede economic growth. [Oil ETFs Rally on Supply Worries]

“Additional exposure to energy prices in one’s portfolio could also serve as a good way to potentially hedge against the negative effects of geopolitical risk,” Gurwitz advised. “At present our preferred way of doing this would be to overweight oil producers in an equity portfolio. This is a stock market sector about which we are optimistic, in any case.”

Some energy sector ETF options include:

  • SPDR Energy Select Sector Fund ETF (NYSEArca: XLE)
  • Vanguard Energy Sector ETF (NYSEArca: VDE)
  • iShares S&P Global Energy Index Fund ETF (NYSEArca: IXC)
  • iShares Dow Jones U.S. Energy Sector Fund ETF (NYSEArca: IYE)

SPDR Energy Select Sector Fund ETF

For more information on the region, visit our Middle East Category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.