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

Key Points

• Renewed U.S.-Iran hostilities and Strait of Hormuz tensions have driven Brent crude prices up more than 16% since mid-July, reigniting the energy sector rally.
• The Vanguard Energy ETF (VDE) offers concentrated exposure to U.S. oil majors such as ExxonMobil, Chevron, and ConocoPhillips,account for which together nearly 42% of its portfolio.
• The iShares Global Energy ETF (IXC) provides broader international diversification, including uranium miner Cameco, and has outperformed VDE with an 8% gain since July 1.

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.