The ongoing conflict between the U.S. and Iran has elevated oil prices, with Brent crude briefly approaching $100 per barrel on Tuesday. Tanker flows through the Strait of Hormuz remain below normal levels. Goldman Sachs has projected that oil prices could reach $120 per barrel if attacks on Middle East shipping escalate.
The Strait of Hormuz typically handles roughly one-fifth of global oil and liquefied natural gas (LNG) shipments, according to the International Energy Agency (IEA). As crude prices remain elevated, the article highlights four exchange-traded funds (ETFs) offering direct exposure to the potential supply shock.
- BNO (United States Brent Oil Fund): This fund uses Brent futures to track daily changes in Brent crude prices. It is described as a direct bet on geopolitical risk. The caveat is that it does not own physical barrels, and its performance can diverge from spot Brent due to futures-market dynamics and rolling contracts. The fund jumped 2.14% pre-market Tuesday.
- XLE (Energy Select Sector SPDR ETF): This fund provides exposure to major U.S. energy companies. Exxonmobil Holdings Corp accounts for nearly 20% of XLE, while Chevron Corporation represents another 15%. Other top holdings include ConocoPhillips, Marathon Petroleum Corp, and Valero Energy Corp. The fund has 21 holdings and charges a 0.08% expense ratio. It was up 1.13% pre-market Tuesday.
- XOP (SPDR S&P Oil & Gas Exploration & Production ETF): This fund takes a more targeted approach, with about 63% of the portfolio allocated to exploration and production companies and another 30% in refining and marketing. Its modified equal-weight structure offers less concentration in mega-cap giants than XLE. The ETF gained 1.44% on Tuesday during the pre-market session.
- USO (United States Oil Fund): This fund provides exposure to light, sweet crude through WTI futures rather than Brent. It could appeal to investors expecting the supply shock to impact U.S. crude prices. The fund was up 2.1% pre-market Tuesday.
The article concludes that a Hormuz shock does not create a single oil ETF trade. The choice of fund depends on whether the crisis is a short-lived risk premium or a prolonged physical supply shock.
