U.S. / Israel – Iran War: Which ETFs Should Investors Watch?
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I knew war was coming when the U.S. started massing air and naval power outside the Persian Gulf. Then you started seeing videos of troops getting served steak and lobster, which is usually a sign.
Well, it’s happened. The U.S. and Israel have struck Iran jointly, killing much of its nuclear leadership as well as head of state Ayatollah Ali Khamenei. They quickly eliminated his successors too.
It hasn’t been smooth sailing, though. As of writing, the U.S. has seen four casualties and three F-15 jets shot down, the result of friendly fire no less, at a unit cost of roughly $90 to $97 million per aircraft. That’s a hefty price tag, but such is the military-industrial complex.
Now what happens next? I don’t know. So far, President Donald Trump and Secretary of War Peter Hegseth have been effective at surgical decapitation-style strikes, first Venezuela and Maduro, now Iran and Khamenei.
But America’s track record when it comes to facilitating long-term regime change hasn’t exactly been stellar. If you remember the Bush and Cheney debacle for Operation Iraqi Freedom, that resulted in a protracted decade-long insurgency and the birth of numerous militant groups, including ISIS.
That’s enough speculation for today. We’re bringing this article back to ETFs. Markets are interconnected, and something with a geopolitical footprint as large as attacking Iran and killing its head of state is absolutely going to roil global markets.
Here are my quick, candid thoughts on some of the ETF segments that have experienced notable volatility, and may continue to do so in the coming months.
Defense ETFs
Unsurprisingly, the main aerospace and defense ETFs are up heavily on the news. If you want exposure, there is no shortage of options, but there is quite a bit of variation under the hood.
A lot of investors default to the iShares U.S. Aerospace & Defense ETF (ITA). It is the largest in the space at roughly $16 billion in assets under management, with a launch date going back to 2006. On paper, that size and history are comforting. But I am not a fan.
ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index. It is relatively narrow at just 41 holdings, and because it is market cap weighted, you end up with some meaningful concentration. At the moment, that includes over 20% in GE Aerospace and roughly 16% in RTX.
If you want to avoid that concentration risk, the SPDR S&P Aerospace & Defense ETF (XAR) from State Street takes a different approach. It carries a lower 0.35% expense ratio and uses an equal-weight methodology. That structure tilts the portfolio more toward mid-cap contractors.
The trade-off is that XAR tends to have more of an aerospace tilt. If your primary objective is to capture the largest prime defense contractors, XAR may not give you quite as much exposure there.
For a long time, my personal favorite was the Invesco Aerospace & Defense ETF (PPA). It tracks a benchmark developed by Spade, which specializes in defense investing.
Compared to ITA and XAR, PPA strikes a middle ground. It emphasizes the large prime contractors without becoming excessively top heavy. The downside is cost. At a 0.58% expense ratio, it is the most expensive of the three.
The wild card in the group is the Global X Defense Tech ETF (SHLD), which has performed strongly since launching in September 2023 and charges a 0.5% management fee. It tracks a proprietary index and moves away from the heavy aerospace bias seen in some of the older funds.
Instead, it leans more directly into defense technology and innovation. That includes international contractors such as Rheinmetall and Elbit Systems, as well as companies with a stronger intelligence and cybersecurity focus, notably Palantir Technologies.
If this conflict escalates and defense budgets expand further, all of these ETFs are positioned to benefit. The differences come down to concentration, methodology, international exposure, and cost.
Middle East ETFs
Immediately following the joint U.S. and Israel strike, Iran retaliated. Not just symbolically, but against targets across the region, striking countries as varied as the UAE, Saudi Arabia, Kuwait, Qatar, and of course, Israel. A lot of that has to do with U.S. presence in the area, particularly military installations.
For investors, all of these countries are accessible through single-country ETFs, largely thanks to iShares, which has one of the most extensive and long-lived lineups in this niche. The options include:
- iShares MSCI Israel ETF (EIS)
- iShares MSCI UAE ETF (UAE)
- iShares MSCI Saudi Arabia ETF (KSA)
- iShares MSCI Kuwait ETF (KWT)
- iShares MSCI Qatar ETF (QAT)
There is not going to be a lot of commentary here because frankly, I am not an expert on Middle East geopolitics and I am not going to pretend to be. But if you are looking to express a regional macro view, whether bullish or bearish, these ETFs can do the trick.
The downside is cost and liquidity. Expense ratios range from roughly 0.59% to 0.75%. Many of these funds hold less liquid emerging market equities, which means the 30-day median bid-ask spreads can be wider than what you are used to.
Transport ETFs
A massive portion of global shipping freight runs through the Strait of Hormuz, a narrow chokepoint that Iran is perfectly positioned to disrupt, whether through missile strikes or outright seizure of cargo.
On the shipping side, the two main instruments that traders gravitate toward are the Breakwave Dry Bulk Shipping ETF (BDRY) and the Breakwave Tanker Shipping ETF (BWET).
Both are extremely expensive, with expense ratios around 3.5%. That is not a typo. The reason is complexity. Neither ETF holds shipping stocks. Instead, they hold shipping futures contracts.
BDRY holds dry bulk freight futures. Its portfolio is split across Capesize, Panamax, and Supramax contracts. Capesize vessels are the massive ships that transport iron ore and coal. Panamax vessels are the largest that can transit the Panama Canal. Supramax ships are mid-sized bulk carriers equipped with onboard cranes for more flexible loading.
BWET, on the other hand, focuses on tanker freight futures. The bulk of its exposure is in Very Large Crude Carrier contracts, which transport crude oil from the Middle East and the Americas to Asia. It also holds Suezmax exposure, about half the size of VLCCs and the largest class able to transit the Suez Canal.
If you have ever traded a shipping stock like ZIM, understand that these ETFs are a completely different animal. You are not buying equity in a company. You are trading freight rate volatility through futures. That makes them far more tactical instruments. Year to date, both have been on a tear, as instability in key maritime corridors tends to drive freight rates higher.
The other segment being hit is passenger aviation. Passenger airliners flying over the Middle East always run the risk of some ham-fisted, overzealous air defense officer mashing the fire button on a surface-to-air missile installation.
Commercial aviation has been caught in geopolitical crossfire before and right now, air travel is already being rerouted. Middle Eastern airspace is critical for many Europe-to-Asia routes, and any disruption adds cost and uncertainty. Unsurprisingly, the U.S. Global Jets ETF (JETS) is down 2.4% on the news.
If this conflict escalates, expect continued volatility. Freight rates could spike. Airline margins could get squeezed. Transport is one of the most immediate transmission channels between geopolitics and markets, and it is already reacting.
