As interest rates rise from a three decade low, investors will have to shift strategies and can even capitalize on potential high performers, such as insurance companies and related exchange traded funds.
According to a recent Goldman Sachs research note, insurance companies are among “the clearest winners” in a rising yield environment as they continue to discount liabilities, reports Jenny Cosgrave for CNBC.
For “most of the last decade,” declining yields weighed on insurance companies’ solvency, Christian Mueller-Glissmann, analyst at Goldman Sachs, said.
During the height of the recent Fed “tapering” rhetoric, yields on benchmark 10-year Treasury bonds hit 2.6%. The yields have since dropped to around 2.5%.
Many insurance companies hold onto longer-duration bonds and have been hurt by low interest rates – the companies keep the holdings until maturity. Looking ahead, higher rates will help insurers earn higher returns on their investments. Moreover, insurers have increased their stock market allocations since mid-2012, Goldman said.
“With better solvency… insurance companies can build excess capital, and as a result there is more scope for risk-taking,” Mueller-Glissmann said. “This could drive re-risking in equities and a reduction in asset duration, in view of potential further increases in bond yields, which can contribute to rising longer-dated rates and steepening of yield curves.”
Investors interested in the insurance sector can take a look at the SPDR S&P Insurance ETF (KIE) . KIE tracks an equal weight index of insurance companies. The fund has a 0.35% expense ratio and a 1.96% 12-month yield.
Additionally, the Dow Jones U.S. Insurance Index Fund (IAK) tracks a large-cap weighted index of insurers. Consequently, the fund is slightly more top heavy and leans toward property and casualty insurance companies. IAK has a 0.47% expense ratio and a 1.60% 12-month yield.
For more information on the insurance industry, visit our insurance category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.