Portfolios Need To Make Consideration For Geopolitical Risks
It doesn’t take much to shake the global markets these days. A U.S. airstrike on Iranian nuclear enrichment facilities is more than enough to do it. The headlines arrived fast and the market reaction wasn’t far behind. Oil prices spiked, investors ran to safe havens and geopolitical risk is suddenly back at the center of the economic conversation.
The strike was reportedly targeted and limited in scope, aimed at slowing Iran’s nuclear progress, but even a “limited” military action in the Middle East can have far-reaching effects, especially when it involves two countries with deep ties to the energy markets.
Iran maintains significant influence over several access points to the Strait of Hormuz. It's a trade route through which a significant amount of the world's oil supply flows through. Any threat to that route immediately puts upward pressure on energy prices.
That’s exactly what we saw. Oil surged on the news and brought with it renewed concern that energy inflation could reenter the picture just as central banks were trying to ease monetary conditions. Higher oil prices feed into everything, including transportation, manufacturing and food. If crude oil stays elevated, consumers could start to feel the pressure at the gas pump and the grocery store. This could set off a chain reaction that complicates the Federal Reserve’s path forward.
That’s the key tension right now. The Fed had been inching toward rate cuts later this year, citing easing inflation and a gradually cooling economy. A fresh spike in commodity prices could delay that plan. If inflation remains elevated, especially driven by geopolitical risks, the central bank may be forced to keep rates higher for longer. That could slow growth and leave the outlook for both stocks and bonds unclear.
For investors, the near-term reaction was familiar. Energy stocks drew some interest, defense contractors rose and gold moved higher. Conversely, cyclically sensitive areas of the market pulled back. Treasuries could find themselves gaining some interest if the flight to safety gains steam.
The bigger question is whether this turns into something longer-term. If this ultimately becomes another short-term event, the markets may move on fairly quickly. If tensions build, however, or if Iran retaliates in a way that disrupts oil flows or triggers further military action, the economic consequences could deepen. That’s the kind of tail risk that makes the markets nervous.
Overall, we feel like the U.S. strike on Iran is a reminder that geopolitical shocks can and do intersect with financial markets in ways that ripple well beyond the headlines. For consumers, it may mean higher inflation and slower relief from interest rates. For investors, it’s another reminder to stay nimble.
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Fund Risks
Multiple funds have a limited operating history of less than a year and risks associated with a new fund.
The Leveraged and Daily Inverse Funds are not suitable for all investors. The investment program of the funds is speculative, entails substantial risks and include asset classes and investment techniques not employed by most ETFs and mutual funds. Investments in the ETFs are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged (2X) or daily inverse (-1X and -2X) investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. For periods longer than a single day, the Fund will lose money if the Underlying Stock’s performance is flat, and it is possible that the Fund will lose money even if the Underlying Stock’s performance increases over a period longer than a single day. An investor could lose the full principal value of his/her investment within a single day. The funds do not directly invest in the underlying stock.
The Funds seek daily inverse or leveraged investment results and are intended to be used as short-term trading vehicles. Each Fund with “Long” in its name attempts to provide daily investment results that correspond to the respective long leveraged multiple of the performance of an underlying stock (each a Leveraged Long Fund). Each Fund with “Short” in its name attempts to provide daily investment results that correspond to the inverse (or opposite) multiple of the performance of an underlying stock (each an Inverse Fund).
Investors should note that the Long Leveraged Funds and the Daily Inverse Funds pursue daily leveraged investment objectives and daily inverse investment objectives (respectively), which means that the fund is riskier than alternatives that do not use leverage and inverse strategies because the fund magnifies the performance of their underlying security. The volatility of the underlying security may affect a Funds' return as much as, or more than, the return of the underlying security.
For the Leveraged Long Funds because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 200% of the return of the Underlying Stock over the same period. The Fund will lose money if the Underlying Stock’s performance is flat over time, and as a result of daily rebalancing, the Underlying Stock volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Underlying Stock’s performance increases over a period longer than a single day.
For the Daily Inverse Funds because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from -100% and 200% of the return of the Underlying Stock over the same period. The Fund will lose money if the Underlying Stock’s performance is flat over time, and as a result of daily rebalancing, the Underlying Stock volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Underlying Stock’s performance decreases over a period longer than a single day.
Shares are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. There can be no guarantee that an active trading market for ETF shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions and frequent trading may incur brokerage costs that detract significantly from investment returns.
An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Inverse Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Underlying Stock and the sector in which it operates. These and other risks can be found in the prospectus.
Investing in physical commodities, including through commodity-linked derivative instruments such as Commodity Futures, Commodity Swaps, as well as other commodity-linked instruments, is speculative and can be extremely volatile and may not be suitable for all investors. Market prices of commodities may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships (whether actual, perceived, anticipated, unanticipated or unrealized); weather; agriculture; trade; domestic and foreign political and economic events and policies; diseases; pestilence; technological developments; currency exchange rate fluctuations; and monetary and other governmental policies, action and inaction.
A liquid secondary market may not exist for the types of commodity-linked derivative instruments the Fund buys, which may make it difficult for the Fund to sell them at an acceptable price. The Fund is new with no operating history. As a result, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case it could ultimately liquidate.
Derivatives may be more sensitive to changes in market conditions and may amplify risks and losses.
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