ETFs to watch during war in Iran

This article was written by Bloomberg Intelligence Senior Analyst Rebecca Sin and Associate Analyst Jack Wang. It appeared first on the Bloomberg Terminal.

Exchange-traded funds focused on the Israeli equity market, the energy sector and shipping could attract flows due to the war in Iran. Though the Israel ETF (EISUS) might face initial volatility, history suggests a “risk-clearing” rally typically follows as a military operation progresses. Record flows into the Energy Select Sector SPDR (XLE US) have been due to the prospect of oil-supply disruption, while a nearly 200% year-to-date gain by the Breakwave Tanker Shipping ETF (BWET US) shows its ability to capture oil-tanker freight-rate spikes.

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Israel ETF has history of ‘relief trade’ rallies

Israel equity ETFs tend to follow a three-stage cycle during military confl icts, typically gaining asgeopolitical risk premiums fall after the war. Stage one is panic as the breakout of war triggers aselloff — for example, the 14% drawdown due to Operation Iron Swords (the war in Gaza) in 2023,and the 4% drawdown due to Operation Rising Lion (an attack on Iran) in 2025. But as aceasefi re approaches, the market often recovers earlier losses. The cycle concludes with a “risk-clearing” rally post-ceasefi re as investors hope the operation will lead to lower long-term riskpremiums in the Middle East.

The statistics in the exhibit are for four Israel equity ETFs listed in the US.

Energy ETF hits record inflow amid war in Iran

Escalating conflict in Iran could drive record flows into energy ETFs. Year-to-date, oil commodities and thematic energy ETFs have attracted around $8.4 billion of inflows. Investors started positioning before the full onset of hostilities; the State Street Energy Select Sector SPDR ETF (XLE US) recorded its two largest monthly inflows on record, pulling in $2.6 billion in January and$2 billion in February.

While oil commodity ETFs are up about 19% and energy-sector ETFs are up about 23% in price this year, oil-equipment and service ETFs have climbed 38%.

World’s top-performing ETF this year

Rising oil-shipping costs amid conflict in Iran have pushed up the Breakwave Tanker Shipping ETF(BWET US), currently the world’s best-performing non-leveraged ETF with year-to-date returns nearing 200%. As the only fund providing direct exposure to crude-oil tanker-freight futures, BWET can capture immediate volatility in maritime logistics. Unlike traditional energy equities, which are often influenced by corporate overhead or broader market sentiment, BWET tracks the actual spot cost of moving oil.

Shipping ETFs might be lower-volatility option

Shipping equity ETFs could be a lower-volatility alternative to futures when capturing war-driven price spikes. Much like gold miners during a bullion rally, shipping companies’ earnings benefit from operating leverage as fleet and labor costs are relatively fixed. Chinese shipping ETFs have underperformed global peers as state intervention in pricing is a headwind for the largely state-owned sector.