With QE3 tapering off the table for the time being, the
insurance industry - a likely beneficiary of a rising interest
rate environment - could see a down phase in the near term as
investors foresee a set back in its progression. But the strength
that the industry has built up so far should push up the sector
ETFs in the long run. So it's better to look at any short-term
price correction pertaining to the no-taper decision as a good
entry point. (Read:
3 ETF Winners from No Taper Shocker
ISHARS-US INSUR (IAK): ETF Research Reports
PWRSH-KBW IP (KBWI): ETF Research Reports
SPDR-KBW INSUR (KIE): ETF Research Reports
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Before zeroing in on the top ETFs in the sector, let us see how
the sector is shaping up for the long run.
The U.S. insurance industry continues to move forward with
consistent earnings growth and decelerating combined ratios from
most of the primary insurers in the first half of 2013. The
expectations for the upcoming quarters also signal optimism. The
key driver of this betterment is the improvement in premium rates
for over a year, after prolonged softness. Further, favorable
reserve development and lower catastrophe losses helped insurers
show their potency. (Read:
Buy these ETFs for the Brighter Insurance Sector
The sector is heading toward a favorable pricing cycle and its
near-term outlook for pricing power remains upbeat in the wake of
rising demand from economically recovering American households.
But a dearth of positive catalysts is delaying the recovery
process of the insurers. Among the fundamental challenges, weak
underwriting gains and low investment yields stand out.
Catastrophe losses further add to the concerns. Though the
industry has not witnessed any severe weather disruption as of
now, it is braving the peak of the hurricane season (mid-August
to late October). So, any active storm, as severe as last year's
Superstorm Sandy, could cause widespread damage and result in
billions of insured losses. Notably, insured property losses due
to Sandy were much higher than the average over the last decade.
Though insurers are preparing themselves better to withstand
significant losses, increased probability of natural catastrophe
will continue to raise concerns. Some analysts expect
catastrophic losses to double every 10 years and the pace of
capacity buildup by the insurers to be insufficient to withstand
the resulting insured losses. (Read:
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Moreover, international events such as continued debt crisis in
the Eurozone and financial issues in emerging markets will
further limit the industry's growth prospects. (Read:
Play a Resurgent Europe with These ETFs
However, the overall health of the industry has improved somewhat
in the recent past riding on the ongoing economic recovery, after
enduring pricing pressures and reduced insured exposure since the
latest recession. Moreover, learning from past experiences,
insurers are resorting to expense saving measures to support
Rising premium rates should ultimately translate into margin
expansion and mitigate the negative impact of the still low
interest rate environment on insurers' investment income.
Further, increasing awareness on the risk of catastrophe, strong
underwriting discipline and favorable reserve development in the
recent quarters should place the industry at least one step
3 Sector ETFs to Profit from Rising Rates
That said, though the market isn't soft anymore, it is not likely
to harden reasonably until the end of 2013. Moreover, a stressed
balance sheet, lack of real employment growth and legislative
challenges are threatening insurers' ability to rebound to the
historical growth rate.
Also, limited organic growth opportunities and strict regulatory
capital requirements will push the industry more toward
consolidation. Insurers are seeking structural economies of scale
through mergers and acquisitions to enhance market share. While
this will help insurers stay afloat, inter-segment competition
Overall, the industry has been undertaking several structural
changes that will make underwriting and pricing schemes more
attractive to consumers. Also, improving fundamentals on the back
of favorable macroeconomic trends make a number of industry
participants appear attractive. (Read:
3 Top Ranked Financial ETFs to Buy Now
3 Insurance ETFs to Buy Now
While an investor looking to play the insurance sector to benefit
from the sector dynamics can directly invest in attractive
insurance stocks, an ETF approach can spread out assets among a
variety of companies and reduce company-specific risk at nominal
All Financials ETFs
There are only a few choices in this space among which we
recommend the following three ETFs that look attractive at this
point with a favorable Zacks Rank. (Read:
Zacks ETF Rank Guide
SPDR S&P Insurance ETF (
KIE closely follows the S&P Insurance Select Industry Index,
which is an equal weight index. Launched in August 2005, the
product manages $357.7 million in assets, which are currently
invested in 48 securities.
The product charges a reasonable 35 basis points per year in
fees. It currently pays out a decent dividend that yields 2.21%.
In terms of holdings, about 40% of the assets are invested in the
property and casualty insurance sector while life & health
account for another 20% of the asset base. Due to the
equal-weight methodology, any single security doesn't account for
more than 2.3% of total assets. The fund carries a Zacks ETF Rank
#2 (Buy) with a medium level of risk.
iShares U.S. Insurance ETF
IAK tracks the Dow Jones U.S. Select Insurance Index - a
free-float adjusted market capitalization-weighted index. The
product was launched in May 2006 and holds 68 stocks in its
basket. It has a moderate dividend yield of 1.50% and charges
investors 46 basis points a year in fees. With a medium level of
risk, the fund holds a Zacks ETF Rank #2 (Buy).
The ETF is slightly top-holdings focused with more than half of
its assets invested in the top 10 securities. From a sector
perspective, it is skewed toward property and casualty insurance
firms with investments of nearly 50% of the asset base while life
insurance companies account for over 34% of its assets.
In terms of individual stocks, AIG accounts for about 12% of the
fund's assets, followed by MetLife with 9% and Prudential
Financial with over 6%.
PowerShares KBW Insurance Portfolio
KBWI follows the KBW Insurance index which comprises 24 insurance
companies representing approximately three-quarters of the market
capitalization. Incepted in November 2005, the product manages
assets worth $8.8 million and charges investors just 35 basis
points a year in fees. It pays a decent dividend that yields
More than half of its assets are invested in the top 10 of the 27
stocks in its kitty. MetLife occupies the top position with
nearly 8% of its assets. The followers are Travelers (nearly 7%)
and Prudential Financial (about 6.5%).
It carries a Zacks ETF Rank #2 (Buy) with a low level of risk.
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