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]

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