ETF Investors Hide Out in Energy Sector amid Iran War

Move over gold, the energy sector is the new safe haven for ETF investors. 

US-listed ETFs attracted just $104 billion of inflows last month, 40% below the $172 billion six-month average, as investors grappled with volatility, growth concerns and inflation risks amid the war with Iran, according to data from State Street Investment Management. Just half of those ETFs attracted assets in March, compared with 70% over the past six months. But while investors were generally subdued spenders, they did pour a record $5 billion into energy sector ETFs as the closure of the Strait of Hormuz caused oil prices to surge. It’s an area of interest for both clients and advisors as the Iran war disrupts the markets.

“One place to hide out was to rotate into the asset that was most positively impacted by the events in Iran as a result of the supply shock … anything tied to the spot price of oil,” said Matthew Bartolini, global head of research strategists at State Street. “We know that energy sector ETFs and energy sector companies have a beta sensitivity to the spot price of oil that can range, but it is positive.” 

Energy In, Gold Out  

While soaring spot oil prices contributed significantly to energy ETFs’ success in March, investors were turning to them even earlier this year. Through February, the sector had already gained 24% following a political shake-up in Venezuela and an upturn in the ISM Manufacturing PMI data, according to State Street. Energy funds have now marked a record 14 weeks straight of inflows. While we likely won’t see a repeat of the significant price movement that happened when oil prices moved from well below $100 a barrel to well above, Bartolini expects more volatility, given the headline-driven and unpredictable nature of the oil situation in the Middle East.  

However, the energy sector wasn’t the only area of the market that garnered significant inflows in March: 

• Short-term government bond ETFs had a record inflow of $29 billion, while their long-term counterparts had $3 billion of outflows. Credit-sensitive sectors experienced $6 billion of outflows. 
• “With yields holding above 3.5% and markets in turmoil, short-duration Treasurys offered something stocks and gold couldn’t: attractive income with very little risk,” Morningstar Associate Manager Research Analyst Brendan McCann wrote in a report published Monday. 

Speaking of gold, gold-related ETFs saw a record $13 billion of outflows as the precious metal’s spot price fell roughly 12%, State Street reported. Generally considered a safe haven, gold took a hit from both the strengthening of the US dollar and waning expectations of an interest rate cut, McCann explained. 

Another Winner. Aerospace and defense-related ETFs brought in a record $3 billion in inflows in March. Investors are buying an area where the firms’ largest customer, the US, is “likely going to need to spend more,” Bartolini said.