After the Federal Reserve said Wednesday that its $85 billion
in monthly bond purchases will remain in place, U.S. equity
markets soared to new record highs.
Using one of those nifty heat maps that are found various
places online, investors would have seen a sea of green.
There were some red spots on those heat maps, too, and not
just among inverse and volatility ETFs. Finding sector ETFs that
slumped Wednesday was not a difficult task because they stuck out
like sore thumbs. Wednesday's tales of woe for sector ETFs were
easily spotted because they were the funds that had been
highlighted as beneficiaries of a rising interest environment,
something that should go by the wayside with tapering off the
Sector ETFs that have reacted poorly to the no tapering news
include regional bank and insurance funds, two sub-industries
that had rallied as 10-year Treasury yields surged almost 41
percent from May 22 through September 17.
Big Week Looming For Insurance ETFs
The SPDR S&P Insurance ETF (NYSE:
) and the iShares U.S. Insurance ETF (NYSE:
) are up 27.4 percent and 29.4 percent year-to-date,
respectively. In a no tapering world, however, further upside for
these ETFs could be limited, particularly if Treasury yields
decline as expected.
Low interest rates pressure net interest income for insurance
providers, so it was not surprising to see KIE and IAK
soar as rates rose
. Life insurance providers, many of which dot the rosters of ETFs
like KIE and IAK, are prosaic businesses.
They take in cash from policyholders premiums, distribute what
needs to be paid and invest the rest. Higher interest rates and
bond yields would have made the companies more profitable for the
simple reason that they would have earned more on their excess
as Barron's reports
KIE is an equal-weight ETF so it is not excessively allocated
to any single stock. In fact, Lincoln National (NYSE:
) is the fund's largest holding with a weight of just 2.54
percent. However, property and casualty and life and health
insurance providers combine for almost 62 percent of the ETF's
IAK may be even more vulnerable as interest rates. That ETF,
the smaller of the two mentioned here, allocates over 83 percent
of its combined weight to property and casualty and life
insurance providers. For example, MetLife (NYSE:
) and Prudential (NYSE:
) are IAK's second- and third-largest holdings, combining for 16
percent of the ETF's weight. High-flying American International
), which does provide life insurance, is IAK's largest holding at
All of those stocks are lower today with MetLife the worst
offender with a 3.1 percent loss. Lincoln National, KIE's top
holding, is plunging 4.2 percent. Torchmark (NYSE:
), another KIE top-10 holding and a
Warren Buffett favorite
is lower by 0.7 percent.
Bottom line: Declining Treasury yields should benefit a
plethora of sector ETFs, just not insurance funds.
For more on ETFs, click
Disclosure: Author does not own any of the securities
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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