Iran Tensions: How to Protect Your Portfolio (Part 2)

Escalating tensions between the United States and Iran pose an increasing risk to economic stability and to financial markets. Yet for investors who think through the implications, that risk brings opportunities as well.

This is the last of a two-part series. To read Part 1, click here.

The Strait of Hormuz: The main military risk is that, in the event that hostilities escalate sufficiently, Iran has the capacity to shut down the Strait of Hormuz, through which roughly 40% of Persian Gulf oil is shipped.

War Games: Last year the New York Times reported on 2002 war games conducted by the US Navy to examine the risk from the small, agile speedboats deployed by Iran in the Gulf. Assuming suicide attacks by a sizable number of such boats, the games resulted in the loss of 16 U.S. warships, including an aircraft carrier, in attacks lasting less than 10 minutes. In other words, Iran has the capacity to inflict what the U.S. would likely regard as unacceptable losses, and thus could successfully close the Strait to shipping.

Exchange Traded Funds (ETFs) That Track Oil: If Iran manages to block the Strait of Hormuz, oil prices will spike, quite possibly to new record highs. Investors can benefit from this via the United States Oil Fund ETF (USO), PowerShares DB Oil Fund (DBO), and MacroShares Oil Up ETF (UOY).

Side Effects of Higher Oil: As the impact of sharply higher oil prices filtered back through the economy, the likely result would be a stunted economic recovery, with renewed downturns possible in the retail and financial sectors. Investors could benefit from this through the ProShares UltraShort Financials ETF (SKF) and the ProShares UltraShort Consumer Goods ETF (SZK).

Renewable Energy Investments: Even if the shock were short-lived, the renewable energy industry would likely benefit from increased investment, as events drove home the economic risks of reliance upon imported oil. Investors can get exposure to this sector through such ETFs as the Van Eck Global Alternative Energy ETF (GEX), PowerShares Wilderhill Clean Energy Portfolio (PBW), and the PowerShares Cleantech Portfolio (PZD).

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