Navigating Geopolitical Crosswinds: ETF Strategies for Energy Volatility and Defense Momentum

The escalating tensions between Israel and Iran, coupled with OPEC+'s supply dynamics, have created a seismic shift in global energy and defense markets. As Brent crude surged to $74/barrel—a six-month high—and defense sector stocks like Raytheon Technologies (RTX) and Palantir (PLTR) soared, investors face a critical question: How to capitalize on this volatility while mitigating risks? The answer lies in strategic ETF allocations that harness oil price swings, defense sector tailwinds, and safe-haven hedges.

The Geopolitical Catalyst: Strait of Hormuz and Oil Market Turbulence

The Israel-Iran conflict has reignited fears of a closure of the Strait of Hormuz, through which 20-25% of global oil flows. While full disruption remains unlikely, the mere threat has kept oil prices elevated. reveal a $5/barrel spike, with WTI crude jumping 7%—its largest gain in three years. This volatility creates opportunities for investors willing to navigate the risks.

Leveraging Oil Volatility: ETFs to Consider

While crude prices are buoyant, the path forward is uncertain. OPEC+'s decision to unwind production cuts has added a bearish undertone, and a de-escalation could send prices back to $60–$65/barrel. Investors must balance short-term gains with long-term risks:

1. Core Exposure: The United States Oil Fund (USO) tracks WTI prices and remains a liquid entry point, though its -0.66% YTD return highlights the challenges of timing.
2. Inverse Plays: The ProShares UltraShort Bloomberg Crude Oil (SCO) (+3.13% YTD) offers a hedge against a potential price drop.
3. Leveraged Caution: ETFs like the ProShares Ultra Bloomberg Crude Oil (UCO) (-12.58% YTD) require strict risk management due to compounding losses in sideways markets.

Defense Sector Momentum: Riding the Geopolitical Wave

Defense stocks are benefiting from a structural shift: global defense spending is projected to grow at a 5% CAGR through 2030, driven by U.S.-Iran tensions, NATO's 2% GDP spending target, and China's military modernization. ETFs that capture this trend are outperforming:

- Global X Defense Tech ETF (SHLD): Up 20.1% YTD, this fund focuses on European defense stocks, insulating it from U.S. tariffs. Top holdings like Raytheon and Palantir—latter up 490% YTD—highlight its tech-driven edge.
- Invesco Aerospace & Defense ETF (PPA): Down 7.5% YTD but poised to rebound if U.S. defense budgets hit $1 trillion in 2026.
- VanEck Junior Gold Miners (GDXJ): While primarily a gold play, its 40% YTD return reflects investor demand for hard assets tied to geopolitical instability.

Hedging with Safe Havens: Gold, Volatility, and Dividends

A “wait-and-see” stance on energy and defense requires pairing these exposures with hedges against macroeconomic risks:

1. Gold's Dual Role:
   The VanEck Gold Miners ETF (GDX) (+23% YTD) and abrdn Physical Silver Shares (SIVR) (+16.72% YTD) offer protection against inflation and currency debasement. show how gold surged to $3,200/oz in 2025 amid trade wars and central bank easing.
2. Volatility as an Asset Class:
   The iPath S&P 500 VIX Short-Term Futures (VXX) (+24% YTD) tracks market fear, making it a tactical hedge during equity selloffs. However, its decay costs (due to futures roll) demand active management.
3. Dividend Stability:
   The First Trust STOXX European Select Dividend ETF (FDD) (+20% YTD) offers a 6.7% yield from European firms like Rio Tinto and Orlen SA, acting as a bond proxy in a low-rate world.

Investment Strategy: A Balanced Approach

1. Aggressive Traders:
2. Long USO with a stop-loss at $65/barrel.
3. Pair with short SCO to capture mean reversion.

4. Deploy 10-15% to leveraged defense ETFs like SHLD.

5. Conservative Investors:

6. Allocate 20-30% to dividend-rich defense contractors (e.g., Lockheed Martin in ITA).

7. Hedge with 10-15% in GDX and VXX.

8. Long-Term Portfolios:

9. Focus on XAR (SPDR S&P Aerospace & Defense ETF), which holds long-term U.S.-Israel contracts.
10. Add gold and silver ETFs for diversification.

Risks and Considerations

• Oil's Downside: A geopolitical de-escalation or OPEC+ oversupply could trigger a sharp correction.
• Defense ETF Costs: Tariffs and high expense ratios (e.g., 0.95% for DFEN) may erode gains.
• Volatility Decay: Leveraged ETFs like VXX require frequent rebalancing.

Conclusion

Geopolitical risks have turned energy and defense into high-octane markets, but success demands discipline. By layering ETFs that exploit oil volatility, capture defense momentum, and hedge with safe havens, investors can navigate this crosswind environment. Stay agile—positioning today will define returns in a world where the only certainty is uncertainty.

Data as of June 19, 2025.