By Lewis Braham
The verdict is still out on Operation Epic Fury, but it has been a roaring success for at least one party -- energy investors.
Oil prices shot up to over $100 a barrel not long after the Trump administration decided to bomb Iran on Saturday, Feb. 28. Fossil-fuel companies saw their share prices explode, while stock and bond markets fizzled.
Morningstar's equity energy fund category was by far the first quarter's best performer, with the average fund surging 33.1%, while the largest, the $42 billion State Street Energy Select Sector SPDR exchange-traded fund, soared 37.8%. By contrast, the behemoth $1.5 trillion Vanguard S&P 500 ETF fell 4.3% and the $395 billion Vanguard Total Bond Market ETF was flat.
Some traders argue that President Donald Trump's recent shift toward peacemaking -- with, most recently, his willingness to cede control of the Strait of Hormuz -- is but another instance of the administration retreating from policies that hurt the stock market.
But unlike a unilateral tariff, a peace deal requires both sides to agree. That hasn't happened, so the market has been seesawing, rallying when Trump props it up with positive remarks and falling again as the war continues. The quarter's final day saw an almost 3% rally in the S&P 500, even as the U.S. sends thousands of more troops to the Middle East.
There has been an unsettling surge in volume for oil and stock futures before the president's market-moving statements, leading market commentators to speculate that insiders are getting the jump on ordinary investors. Hedge fund managers can make money whether the stock market goes up or down, and they can also profit from alternative asset classes such as gold and oil.
Macro trading, the strategy practiced by Scott Bessent before he became Treasury Secretary, is one of the few hedge-fund-like categories to do well since the war began. The average fund in Morningstar's macro trading category was up 7.3%. Funds like BlackRock Tactical Opportunities and Campbell Systematic Macro have been rising in the past month and were up 3.4% and 7%, respectively, for the quarter overall.
Systematic trend and multistrategy funds, which can go long and short on futures for stock indexes and commodities such as oil, also did well. Two popular mutual funds in these categories, AQR Style Premia Alternative and LoCorr Market Trend, were up 9.9% and 13.1%, respectively.
The simplest way to hedge this war is to buy a commodities futures fund. The United States Oil ETF beat oil stock funds by betting on the commodity directly, leaping 82.9% in the quarter. Still, long term, a diversified commodity futures fund is a better choice for investors seeking less-volatile outcomes. The average fund in the commodities broad basket Morningstar category gained 22.1%, making it the third-best-performing fund category.
The oil surge also benefited the U.S. dollar to the detriment of foreign currencies, as oil is generally priced in dollars. Thus, when oil rises, so does demand for the dollar against other currencies.
Consequently, foreign stock funds have underperformed U.S. ones since the war began because stocks in most foreign funds are priced in local currencies. Consider that since Feb. 27, the day before war broke out, the popular iShares MSCI EAFE ETF has fallen 8.2%, while its iShares Currency Hedged MSCI EAFE counterpart has lost 5.5%. For similar reasons, gold, a hedge against a falling dollar, has suffered. The $152 billion SPDR Gold Shares ETF is down 11.8% since Feb. 27, although it was up 6.9% for the quarter overall.
Still, foreign stocks remain cheap, and because of prewar gains in the quarter, the average foreign large blend fund's 0.3% gain still beat the average U.S. large blend fund's 4% loss. Yet if the petrodollar warfare continues, it may be worth considering funds which hedge their currency exposure. The hedged Franklin International Low Volatility High Dividend Index ETF is a good one, up 9.1% in the quarter overall.
Meanwhile, the casualties of war include mainstay growth stock funds. Large growth funds in particular have suffered, down 9% on average in the quarter and 5.4% in the past month. The three largest, the Invesco QQQ and Vanguard Growth ETFs and American Funds' Growth Fund of America, collectively manage over $1 trillion.
Much like in 2022 when inflation was a concern, value funds have beaten growth. Value stocks tend to be less sensitive to the rising interest rates seen during inflationary periods. It also doesn't hurt that energy stocks tend to be in value indexes and funds. The average large value fund gained 1.6% in the quarter and fell 4.7% in the past month. The largest, the $239 billion Vanguard Value ETF, was up 3.3% in the quarter.
The quarter's best performer was the tiny $52 million Breakwave Tanker Shipping ETF, which uses futures to capture the cost of shipping oil with tankers. Given that Iran's primary military strategy is to shutter the Strait of Hormuz, where 20% of the world's oil supply ships, the ETF was up over 500%. Asset flows aren't available yet for the entire quarter, so it's hard to tell how investors have reacted to the war; the data stop at Feb. 28. The big winners flow-wise were taxable bond funds, which saw $185.5 billion in new investor money. Bonds have been a safer bet, with the average intermediate core bond fund flat this year.
Overall, passive indexed mutual funds and ETFs received $232.9 billion in new money, and active funds only $97.6 billion. Even a war can't stop the indexing trend.
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This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 03, 2026 02:00 ET (06:00 GMT)
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