Flow-Driven Plays: Oil, Gold, and Defense ETFs in the Iran Conflict

The immediate money flow into oil exposure was stark on February 18. When U.S. Vice President JD Vance warned of potential military action, oil prices jumped more than 4% and the benchmark United States Oil Fund, LP (USO) added 4.9% that day. This surge was a direct reaction to escalating geopolitical tensions and fears of supply disruption.

Beyond spot oil, leveraged ETFs saw even more extreme moves. The ProShares Ultra Bloomberg Crude Oil fund (UCO) added 8.3% on the same day. More broadly, the Breakwave Tanker Shipping ETF (BWET) has become a pure play on oil freight futures, with returns of around 98% so far in 2026. This massive YTD gain reflects market bets that tanker rates-and thus oil transport costs-will rise if supply routes are threatened.

The flow of capital and fear has now pushed physical oil prices higher. On Friday, oil prices surged 3.7% to settle at $72.87 per barrel for Brent. With the Strait of Hormuz effectively closed, the market is pricing in a major supply shock. U.S. crude oil is on track to rise by 9% when trading resumes, potentially pushing the benchmark above $73 a barrel.

Safe-Haven Flows into Gold and Treasuries

The explicit expectation for a risk-off shift has materialized. As geopolitical tensions spiked, investors moved capital from volatile assets into traditional safe havens. This flight to safety is directly impacting benchmark prices, with gold leading the charge.

The move into gold was immediate and significant. On weekend markets, gold was up 2.25% to almost $5,400 an ounce. Silver followed with an even stronger gain, trading 3.2% higher. These moves confirm the market's immediate reaction to the conflict, with precious metals serving as a primary hedge against uncertainty.

The stress, however, extends beyond precious metals. The local liquidity crisis is severe. The Kuwait stock exchange suspended trading entirely due to "exceptional circumstances," a stark indicator of the extreme volatility and potential for a breakdown in normal market operations during this period of acute geopolitical risk.

Defense Sector ETF Volume Surge

The market is positioning for a sustained defense build-up, with trading flows into aerospace and defense equities showing clear momentum. The iShares US Aerospace & Defense ETF (ITA) has gained 14% year-to-date, a strong performance that signals investors are betting on increased military spending as a direct consequence of the ongoing conflict. This isn't just a U.S. story; the demand for defense contractors is global, with contractors in Japan and Korea also experiencing expanded opportunities as regional allies prepare for potential escalation.

The catalyst for this flow is the duration of the U.S.-Israel bombing campaign and the actual status of the Strait of Hormuz. The market is pricing in a prolonged military operation, with President Trump stating the strikes would be "massive and ongoing" and continue "uninterrupted throughout the week or, as long as necessary". The key variable is whether Iran closes the Strait of Hormuz, a critical chokepoint for global oil. A prolonged closure would dramatically increase the perceived threat level, directly fueling the rationale for higher defense budgets and stock prices.

The bottom line is that defense ETFs are seeing volume and flows as a direct hedge against a protracted conflict. The 14% YTD gain in ITA is the visible result of this positioning, driven by the expectation that the current military campaign will not be a brief episode but a catalyst for a longer-term increase in defense spending across allied nations.