Pension Funds Eye Oil ETFs Amid Volatility, Middle East Tensions

Oil and energy ETFs have garnered interest from many institutional investors over the last few years, but experts say it is important for investors to be wary of short-term volatility in commodity-linked ETFs amid current Middle East tensions.

But ETFs aren’t always straightforward, as there are “roll costs” associated with futures-based oil ETFs, which is when the price of the next futures contract is higher than the currently-held contract.

Oil prices first skyrocketed on June 13 when Israel launched a major military operation against Iran, causing the price of brent crude to jump to more than $78/bbl. However, over the last few days, as tensions have de-escalated, oils prices have sunk, with brent crude falling to around $67/bbl.

On the equity side, there are currently 65 ETFs in the U.S. that provide exposure to the energy sector, comprising $68 billion in total assets, according to Aniket Ullal, head of ETF research and analytics at CFRA. This is dominated by State Street Global Advisors’ Energy Select Sector SPDR Fund (XLE), which has $27 billion in assets.

Several institutional investors hold XLE in their portfolios, including the $123 billion Healthcare of Ontario Pension Plan, the $714.4 billion Canada Pension Plan Investment Board and the $17 billion Municipal Employees’ Retirement System of Michigan, according to Bloomberg data as of March 2025.

XLE, whose top holdings include Exxon Mobil Corp. and Chevron Corp., has been down about 3.5% from June 23 to June 26.

Rob Thummel, managing director and senior portfolio manager at Tortoise Capital, a $9 billion asset manager focused on the energy sector, said XLE has a lot of concentration risk because it is focused on the oil and gas producers, like Exxon Mobil and Chevron, who have much more commodity price exposure than other energy-focused equity ETFs.

Other large, energy-focused ETFs like the United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) have also attracted a number of brokerage firms, banks and hedge fund managers who are investors in the fund—notably Jane Street Group, UBS and Morgan Stanley, among others. Between June 20 and June 26, both USO and BNO were down about 10.5% and 10.3%, respectively.

Most ETFs— like USO and BNO—do not invest directly in barrels of oil, but rather invest in oil futures contracts, which are agreements to buy or sell oil at a future date.

Ullal said investors in futures-based oil ETFs need to be wary of roll costs.

“This can sometimes result in futures-based ETFs having lower returns than what investors may observe in the spot crude oil market,” Ullal explained. “One strategy to mitigate this is to try to find futures-based ETFs that optimize roll costs ... Instead of automatically rolling into the next contract, the fund managers may dynamically roll into a contract that is further out on the curve to reduce roll costs.”

Thummel said while the geopolitical pendulum keeps swinging back and forth, he doesn’t see oil prices rising dramatically unless there is a significant supply disruption.

President Donald Trump said in a press conference on June 24 that China can continue to purchase oil from Iran amid the ceasefire, which means that Iran will continue to export about 1.7 MMbbl/d of oil, according to the Foundation for Defense Democracies.

Thummel predicts oil prices will continue to stay in the $60/bbl range for a while, as the oil market is currently oversupplied, he said.

However, Ullal said analysts at his research firm believe that some economic impacts of the conflict have not yet been fully priced in and predict that oil prices will rise again.

CFRA has a team of fundamental analysts who track each sector of ETFs, and Ullal said the firm had energy as an underweight sector until June 13 when analysts upgraded the sector to market weight.

“Our fundamental analysts have become more bullish on energy, primarily driven by expectations that prices may go up because of some of the conflicts in the Middle East,” Ullal said.

A defense analyst who is part of CFRA’s policy group has assigned a 55% probability to the ceasefire holding, Ullal added.

Tortoise Capital’s actively managed ETF, the Tortoise Essential Energy Fund (TPZ), has been up around 1.1% from June 11 to June 25. Thummel attributes this positive performance to managers reducing the fund’s exposure to commodity-sensitive gas producers, such as oil-focused infrastructure stocks, as well buying stocks that benefit from higher electricity demand, driven by the development of AI. Tortoise made these adjustments in April 2025, he said.

“Electricity is becoming the new oil,” Thummel said. “Electricity generation in the U.S. is already increasing after two decades of basically no growth. So that’s why we’ve been increasing our exposure to electricity generation.”

He added that the U.S. is currently one of the largest energy exporters in the world, particularly of petroleum and natural gas, and will be increasing its energy exports, thus why Tortoise has been investing more in energy infrastructure.

High energy costs could also impact ETFs that hold companies with significant energy inputs, such as airlines. In June 2025, Themes Airlines ETF (AIRL) and U.S. Global Jets ETF (JETS) moved in the opposite direction of crude oil prices. Ullal said these funds fell when crude oil prices rose but stabilized when the Iran-Israel conflict moderated.

Some institutional investors holding JETS include the State of Wisconsin Investment Board, Calamos Partners and CVA Family Office, according to Bloomberg data.

The State of Wisconsin Investment Board sold off $64,000, or 3.13% of its position, in JETS, and the Municipal Employees’ Retirement System of Michigan sold off more than $130,000, or 0.08% of its position, in XLE, according to Bloomberg data as of March 31.