Ride Higher on the Anxiety

 | Jan 12, 2012 | 11:00 AM EST  | Comments
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This commentary originally appeared Jan. 12 at 8:30 a.m. EST on ETF Profits -- to access all the strategies from our team of ETF professionals, click here.

While there are countless potential sources of inspiration for investors, sometimes the most effective source for actionable ideas can be newspaper headlines -- and one situation I've been keeping a close eye on recently has been Iran. That's not only because of the increased rhetoric on the topic from the contenders for the Republican presidential nomination. With tensions in the Middle East once again flaring, it seems that oil could be in line for a short-term price bump -- and that makes several ETFs appealing as tactical plays.

Tough talk from Iran's president in recent days has fueled speculation that the country may attempt to shut down the strategically important Strait of Hormuz, a waterway through which about 20% of the global oil supply flows. In a show of frustration with Iran's apparent nuclear ambitions, the European Union has proposed an embargo of Iranian oil, which would further strain supplies.

Throw in the fact that Iran just sentenced an American citizen to death for alleged spy activity, and the recent assassination of a scientist believed to be working on uranium-enrichment technology, and it certainly seems as if a potentially serious geopolitical firestorm is brewing. While we aren't necessarily on the brink of an all-out war, it seems unlikely that these tensions will disappear overnight.

All that said, I expect demand for oil to be relatively stable and predictable over the next six to eight months. While manufacturing activity is picking up around the globe and the recent jobs data has been encouraging, the odds of a demand surge significant enough to move prices are extremely low.

Far less certain is the supply side of the equation. Even if the powder keg doesn't ignite in the next few sessions, the basis for extreme anxiety has formed to sufficiently push prices higher. In other words, I'm not necessarily convinced that Iran is going to wreak havoc on the global oil supply, but there is certainly reason to be anxious, and fear can be a powerful force in the market.

With that in mind, these two ETFs are particularly well-positioned to profit from a surge in investor anxiety in the not-so-distant future.

United States Oil Fund (USO): The oldest and most popular crude oil ETF, this fund remains one of the most effective ways to bet on a spike in crude prices. Because USO comprises short-term futures contracts, it probably isn't suitable for long-term buy-and-hold investors -- the effect known as contango will erode returns over an extended period of time. But, for positions expected to be open for a week or so, USO remains highly effective.

United States Brent Oil Fund (BNO): This ETF, which focuses on futures contracts for Brent crude oil, might actually be the preferred option for a jump in oil prices in upcoming sessions. Brent is more widely used in Europe, and that region is positioned to feel the most significant impact from any concerns over a shutdown in Hormuz or a curtailing of Iranian oil.

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