As the Iran War Resumes, 2 Energy ETFs Ride Oil’s Renewed Rally

After leading the markets for much of the first half of the year, energy stocks tapered off from mid-May through the start of July as a tenuous agreement between Iran and the United States helped normalize oil prices. But tensions in the Middle East have once again flared up, with the two countries exchanging missile fire and conflicting statements about maritime traffic in the Strait of Hormuz.

On June 17, the countries signed a memorandum of understanding that extended the ceasefire for 60 days while they negotiated a final agreement. The price of Brent crude—the global oil benchmark—had already begun moderating, falling nearly 40% from its year-to-date (YTD) high of $118.35 on March 31 to $71.44 by July 1.

However, over the past two weeks, fighting has resumed. On July 8, President Donald Trump declared that the ceasefire with Iran was over. Iran has stated that the Strait of Hormuz is once again closed, which caused the Trump administration to retaliate with a renewed blockade. On July 13, the Trump administration announced that the United States would reinstate its blockade of Iranian ships and vessels serving Iranian ports or customers beginning July 14.

The renewed volatility has put the energy trade back in focus, and the market reaction has been swift. From its July 1 low, Brent crude has risen more than 16%, while the energy sector has gained 3.49% over the past five trading sessions—the strongest performance among the S&P 500’s 11 sectors.

For investors looking to participate in the rebound without selecting an individual oil stock, two exchange-traded funds (ETFs) offer distinct ways to gain exposure to rising oil prices.

Vanguard’s Heavily Concentrated Oil Major ETF

The Vanguard Energy ETF (NYSEARCA: VDE) is designed to track the performance of the Morgan Stanley Capital International (MSCI) U.S. Investable Market Energy 25/50 Index, which is composed of large-, mid- and small-cap energy stocks listed on U.S. exchanges.

Because of the passively managed fund’s focus on companies operating within the U.S. energy market, its portfolio holds oil majors including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP). That targeted exposure results in a high concentration, with just those three companies accounting for nearly 42% of the portfolio.

From late March to mid-June, the VDE had been rangebound, trading between its YTD high of $176.95 and its 90-day low of $149.33 on July 1. But since then, the ETF has rallied 7.25%, helped along by renewed U.S. strikes on July 7 and 8.

With expectations of the war coming to an end during Q2, the fund has seen institutional selling exceed buying by nearly two to one, with outflows of $8.18 million against inflows of $4.59 million. But now that military strikes have once again disrupted the global oil market, the VDE should continue to see robust inflows.

Meanwhile, Wall Street’s bears are staying away from the fund. Current short interest stands at just 0.22% of the float, or a mere 132,485 shares.

iShares’ International Large-Cap Energy ETF

The iShares Global Energy ETF (NYSEARCA: IXC) seeks to track the S&P Global 1200 Energy 4.5/22.5/45 Capped Index (Net), a subset of the S&P Global 1200 Index that measures the performance of large-cap oil stocks worldwide and is dominated by major U.S., Canadian, and European oil and gas companies.

The IXC’s holdings reflect that. Whereas nearly 93% of the companies in the VDE’s portfolio are domiciled in the United States, with the IXC, that figure falls to less than 60%. The companies the fund holds are involved in oil equipment and services; oil exploration, production, and refinement; oil storage and transportation; and coal and uranium mining.

That last part adds a nice layer of diversification within the energy sector. In addition to holding Big Oil companies including ExxonMobil, Chevron, and Shell (NYSE: SHEL), the fund also provides investors with exposure to Cameco (NYSE: CCJ), the world’s largest publicly traded uranium company, which accounts for approximately 17% of global production.

Similar to the VDE, the iShares Global Energy ETF traded within a range from mid-March until late June. But its breakout has been even more pronounced than the VDE. Since its 90-day low—also on July 1—the fund has gained 8%, putting it less than 10% off of its YTD high.

The ETF has also withstood the ceasefire better than its Vanguard counterpart. Institutional buying surpassed selling in Q1 and Q2, with Q2 outflows totaling just $39,000. Bears are also disinterested in the IXC, with 0.46% of the float—or 185,626 shares—currently shorted.

Where Should You Invest $1,000 Right Now?

Before you make your next trade, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis.

Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and none of the big name stocks were on the list.

They believe these five stocks are the five best companies for investors to buy now...

See The Five Stocks Here

The article "As the Iran War Resumes, 2 Energy ETFs Ride Oil’s Renewed Rally" first appeared on MarketBeat.