ETF Strategies To Stave Off Middle East Tension

Tensions in the Middle East crept up last week after a U.S. drone strike near the Baghdad international airport killed Iran’s top commander General Qassim Soleimani. His death has aggravated tensions between the United States and Iran, flaring up concerns of Iranian retaliation.

The United States and Iran have been at loggerheads for about one and a half years now. The United States had placed a set of sanctions against Iran to put an embargo on Iran’s missile and nuclear programs, and curtail its influence on the Middle East (read: US Tightens Sanctions on Iran: Country ETFs to Gain/Suffer).

The aftermath of the U.S. air strike and the killing of an Iranian commander was the passage of a resolution at the Iraqi parliament that demanded expulsion of all foreign troop’s presence and Iran’s pulling back from the 2015 nuclear deal.

The latest U.S. move follows a New Year Eve attack by Iran-backed militia on the U.S. Embassy in Baghdad. Strategists are expecting U.S.-Iran tensions to flare up in the medium term. Germany already called for a “crisis meeting of EU foreign ministers” over Middle East tension (read: Iraq Attack: Sector ETF Winners and Losers).

Volatility in the stock market rose with iPath Series B S&P 500 VIX Short-Term Futures ETN VXX gaining about 5.3% on Jan 3. Global equities fell with the S&P 500-based ETF SPDR S&P 500 ETF Trust (ASX:SPY) SPY (NYSE:SPY) and SPDR Dow Jones Industrial Average (NYSE:DIA) ETF Trust (TSXV:DIA) losing about 0.8% and Invesco QQQ Trust QQQ shedding about 0.9%, respectively. All-world ETF iShares MSCI ACWI ETF ACWI was off 0.9% on Jan 3. Safe-haven trade intensified as the yield on the 10-year benchmark U.S. Treasury fell to 1.80% on Jan 3 from 1.88% recorded the earlier day.

Against this backdrop, the investing world may be at a loss of ideas on where to park money for smart gains. For them, below we detail possible asset class movements and the likely smart ETF bets, if geopolitical tensions continue.

Inclination for Safe-Haven Bets

When risk-on trade subsides, the common investing practice is to turn to safe-haven trades. A dovish Fed and geopolitical concerns may lead safe-haven asset U.S. Treasury valuation and the related ETF iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (NZ:TLT) to soar.

Gold is often viewed as a safe haven asset to protect against financial risks and may perform well on heightened market volatility. Since the metal’s pricing is normally inversely related to the greenback, SPDR Gold Trust (P:GLD) ETF GLD (NYSE:GLD) should jump. In the U.S. markets, spot gold reached its highest level since April 2013. Safe currency ETFs like CurrencyShares Japanese Yen ETF FXY can also be decent plays at this moment.

Drive for Dividends

High dividend ETFs may also be helpful now as higher current income can make up for capital losses to some extent. U.S.-based dividend ETFs including Vanguard High Dividend Yield ETF VYM and PowerShares S&P 500 High Dividend Low Volatility ETF SPHD could be useful for investors in waiting out the volatility via current income.

Safe Sectors Will Likely Sizzle Too

Investors should note that amid a spike in volatility, utility ETFs like Utilities Select Sector SPDR Fund XLU (up about 0.2%) and REIT ETFs like Vanguard REIT ETF VNQ (up 0.6%) were actually in the green. These sectors are high yielding and perform better in a low rate environment. So, these could prove to be good buys if the market is gripped by Middle East uncertainty.

Bet on Oil

Oil prices surged on Middle East tensions. The two Middle East countries’ (Iraq and Iran) joint oil output was more than 6.7 million barrels a day last month (more than 20% of the total OPEC output), according to data compiled by Bloomberg. As a result, fears of supply disruption boosted oil prices. International benchmark Brent crude has been hovering around $70/bbl.

One can bet on US Brent Oil BNO, US Oil Fund USO, S&P Oil & Gas Eqpt & Services SPDR XES and SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP) ETF (CSE:XOP) (read: Oil Rally in the Cards for 2020: ETF & Stock Picks).

Play Volatility ETFs

The fear gauge — the CBOE Volatility Index (VIX) — tends to outperform when markets are declining or fear levels pertaining to the future are high. There are several ETF/ETN options available in the market that can provide some exposure to volatility. So, one can play VXX, ProShares VIX Short-Term Futures ETF VIXY and VelocityShares Daily Long VIX Short-Term ETN VIIX (read: How to Play Market Volatility With ETFs).

Get Ready for Low Volatility & Defensive ETFs

If volatility levels crawl up, investors can deal with this in various ways. First comes low-volatility U.S. ETFs like iShares Edge MSCI Min Vol USA ETF USMV, which gained 0.06% on Jan 3. Another way to fight volatility is with defensive ETFs like U.S Market Neutral Anti-Beta Fund (NYSE:BTA) and AdvisorShares Active Bear ETF HDGE.

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