Investors Shift to ETFs as Geopolitical Risk Rises

Investors increased allocations to exchange-traded funds in 2026 to limit direct exposure to energy and to diversify amid heightened geopolitical risk. The shifts followed a U.S.-Israeli attack on Iran and a U.S. blockade of the Strait of Hormuz that disrupted oil shipments and fertilizer exports.

The Strait of Hormuz blockade slowed shipping and reduced fertilizer flows, contributing to higher fuel and food costs and pressuring corporate margins. Consulting firm Rystad Energy estimated more than $58 billion in energy infrastructure damage from the Iran conflict as of April 15, 2026. Goldman Sachs warned that global oil stocks were approaching an eight-year low. Airlines and other fuel-intensive companies reported acute effects, and broader inflation measures moved higher in recent months.

Major technology companies reported strong results that kept broad market indices elevated. Apple reported Q2 2026 revenue up 17% year over year. That performance left many investors concentrated in large-cap tech, which advisers describe as a concentration risk and a reason to seek broader exposures through ETFs that track different sectors, regions and strategies.

Fund flows favored large-cap technology, emerging markets and income-focused ETFs. The Vanguard Information Technology ETF (VGT), a low-cost large-cap tech fund with a net expense ratio of nine basis points, had its net asset value rise about 9.65% through April 30, 2026. Region-specific and active funds also saw inflows: the Matthews Korea Active ETF returned 66.9% year to date and targets South Korea’s technology supply chain, while the T. Rowe Price International Equity Research ETF, an active non-U.S. equity vehicle charging 38 basis points, returned about 9.3% year to date.

Income and defensive ETF strategies attracted interest from investors seeking steadier returns. Funds that generate yield through covered-call strategies or that emphasize dividends gained traction. Examples include the T. Rowe Price Capital Appreciation Premium Income ETF, which combines active equity exposure with a call-selling approach, and the ALPS Emerging Sector Dividend Dogs ETF, which applies a dividend-focused selection to emerging-market sectors.

Advisers highlighted diversification as a practical response to geopolitical shocks. Allocations that reduce correlation with oil and energy can limit downside if energy markets worsen, while international and emerging-market exposure can lower reliance on large U.S. tech positions. Active managers were cited for their ability to identify opportunities in foreign markets and to shift exposures as conditions change.

A division exists among market strategists on the long-term market impact of geopolitical events. Brian Levitt, chief global market strategist at Invesco, wrote in a March analysis that the S&P 500 ended up positive in 10 of 13 cases a year after significant peaks in a geopolitical risk index and added, “While unnerving, geopolitical conflicts shouldn’t change investors’ long-term investment plans, in my view.”

Other observers flagged the risk of conflict spreading beyond Iran. They cited a U.S. operation in Venezuela earlier in the year and pointed to potential tensions over Taiwan that could affect the Strait of Malacca and semiconductor supply chains. Those developments could challenge portfolios that assume uninterrupted global trade and technology supply links.

ETF wrappers allowed investors and advisers to adjust exposures quickly and at low cost, whether shifting into sector- or region-specific funds, selecting active international managers, or adding income-generating strategies. The combination of energy-driven market pressure and concentrated equity leadership led market participants to use ETFs both as tactical hedges and as components of broader diversification plans.