With QE3 tapering on the table and an improving economic scenario, the insurance industry is performing remarkably well compared to other corners of the financial space. The segment is expected to be the clear beneficiary of a rising interest rate environment.
This is because most insurance companies, in particular life insurance, invest in longer-duration bonds, which enable them to earn more on their investment portfolios from higher interest rates. But at the same time, these firms incur losses as the value of longer-duration bonds goes down with rising interest rates.
Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized (read: 3 Ways to Play Rising Rates with Inverse Treasury ETFs).
Further, recent encouraging economic data – particularly in areas of housing, labor market, manufacturing, and consumer spending – point to stronger economic growth heading into 2014. This resilient business climate would lead to higher demand for all types of insurance services.
Moreover, the upside in the space could be confirmed by the Zacks Industry Rank, as four out of five insurance industries actually have a solid Rank at the time of writing. Two segments – accident/health and property/casualty – have Zacks Ranks in the top 5% while another two - multi-line and life – have Ranks in the top 40%.
This suggests smooth trading in the coming months and that the sector is well positioned compared to others in the financial space (see: all the Financial ETFs here).
Insurance ETFs in Focus
Investors looking to gain exposure to this bullish trend may want to take a look at the following three ETFs, as these offer diversified exposure to a variety of insurance companies.
Investor should note that these insurance products have clearly outpaced the broad sector fund (XLF) by a wide margin. This outperformance is expected to continue in the coming months as the trio has a Zacks ETF Rank of 2 or ‘Buy’ rating.
PowerShares KBW Insurance Fund (KBWI)
This fund tracks the KBW Insurance Index and holds 24 securities in its basket. It is relatively well spread out among its top 10 holdings with 56.6% of assets, at least considering the small number of securities in the portfolio. MetLife (MET), Prudential Financial (PRU) and Travelers Co (TRV) take the top three spots in the basket.
In terms of sectors, property and casualty insurance firms account for about 37.5% of the asset base while life and health insurance companies hold about 33% of assets. The product has amassed about $13.1 million in AUM while volume is very light. The ETF charges a low annual fee of 35 bps and it has returned over 54% in the year-to-date time frame.
SPDR S&P Insurance ETF (KIE)
This fund follows the S&P Insurance Select Industry Index and offers equal weight exposure across 50 stocks, suggesting no concentration risk. First American Financial (FAF), Genworth Financial (GNW) and Assured Guaranty (AGO) are the top three elements in the basket and none of the securities take up more than 2.35% of total assets (read: A Comprehensive Guide to Insurance ETFs).
About two-fifths of the portfolio is allocated to the property and casualty insurance sector while life & health account for another one-fifth share. The ETF has $467.3 million in assets so far and trades in good volume. The product has expense ratio of 0.35% and it has added nearly 43% this year.
iShares U.S. Insurance ETF (IAK)
With AUM of $163.3 million, this product tracks the Dow Jones U.S. Select Insurance Index and holds 68 securities in its basket. Expense ratio is at 45 bps a year while volume is light. The fund has the largest allocation to the top firm – American International (AIG) – with 11.19% share, closely followed by Metlife (MET) at 9.12%. Other firms do not hold more than 6.81% of assets.
Here again, property and casualty insurance takes the top spot, accounting for half of the asset base, in terms of industry exposure. Life insurance and full time insurance take the remaining portion in the basket. The fund is up nearly 42.4% in the year-to-date time frame (read: 3 Sector ETFs Crushing the Market in 2013).
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