Taking many investors and analysts by surprise, interest rates
in the U.S. have moved southward this year despite the initiation
of QE taper. Persistently soft job growth, housing start as well as
the fear of a gradual cease in cheap dollar inflows thanks to the
QE taper and the resultant emerging market lull encouraged
risk-loathing investors to flock to safe haven U.S. government debt
3 Bond ETFs Kick Off 2014 with Strong Inflows
Also, the slowdown in the world's second largest economy, China,
and the escalating turmoil in Ukraine bolstered the demand for safe
haven assets pushing yields lower. While this has spread cheer in
the market, some sectors like insurance were hit hard.
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. Although, the value of the bonds keep tanking with rising
rates, holding the security until maturity rewards investors with
the face value price, leading to no material loss for bondholders
A Comprehensive Guide to Insurance ETFs
However, the present interest rate scenario is following an
opposite trend with long-term interest rates falling more steeply
than the shorter ones. In the first two months of the year, yield
on the 10-year Treasury note slipped
in the year-to-date frame while yields on the one-year
Treasury note dipped 7.7%. This has weighed on the insurance
industry lately, though many have rebounded to start March.
Is it a good entry point?
Probably yes. With the Fed seems steadfast in curtailing its
massive monetary stimulus, rates are likely to rise in the coming
days. Though higher demand for government bonds has kept the
interest rates under control for now, the scenario is unlikely to
persist when the bond buying spree bottoms out. Further, a
scale-back in QE means stronger economic growth which will lead to
higher demand for various insurance services.
Given this bullish outlook, the recent dip can very well serve as a
buying opportunity. Thus, a look at some of the ETFs in the
insurance industry could be a good way to target the best of the
segment with lower levels of risk. In this space, any of the ETFs
can prove to be a prudent choice as all are buy-ranked options
Best ETF Strategies for 2014
SPDR S&P Insurance ETF (
Launched in November 2005,
looks to track the performance of the U.S. insurance stocks. The
ETF has assets worth $294.8 million, and the product holds 51
securities with an equal weighted approach. The product charges a
reasonable 35 basis points per year in fees (read:
Inside The Top Ranked Insurance ETF
In terms of holdings, over 38% of the assets are invested in the
property and casualty insurance sector followed by 22.6% holdings
in life & health insurance. Due to the equal-weight
methodology, no stock accounts for more than 2.49% of the basket.
The fund carries a Zacks ETF Rank #2 (Buy) and a medium level of
iShares U.S. Insurance ETF
Launched in May 2006, IAK tracks the Dow Jones U.S. Select
Insurance Index. The product invests about $151.7 million of assets
in 67 securities. It charges investors a little more at 45 basis
points a year in fees. The ETF carries concentration risk.
From a sector perspective, it is skewed toward property and
casualty insurance firms with investments of nearly 47.8% of the
asset base while life insurance companies account for nearly 36% of
its assets. In terms of individual stocks, AIG accounts for about
12% of the fund's assets, followed by MetLife with nearly 10% and
Prudential Financial with over 7%.
With a medium level of risk, the fund holds a Zacks ETF Rank
PowerShares KBW Property & Casualty Insurance
This fund is an unloved choice by investors having amassed just $16
million in assets so far. It closely tracks the KBW Property &
Casualty Index, a modified market capitalization weighted index,
which seeks to reflect the performance of approximately 24 property
and casualty insurance companies. The product charges a reasonable
35 basis points per year in fees.
The fund has company-specific concentration risks. Allstate Corp
occupies the top position with over 8% of its assets followed by
Travelers (over 7%) and Progressive Corp (over 7%).
The fund holds a Zacks ETF Rank #2.
PowerShares KBW Insurance Portfolio (
KBWI follows the KBW Insurance index. This often overlooked product
invests $12.6 million in assets in 24 holdings. The product charges
investors just 35 basis points a year in fees.
More than half of its assets are invested in the top 10 holdings.
MetLife occupies the top position with nearly 7.82% of its assets
trailed by Prudential Financial (about 6.58%) and Travelers (over
It carries a Zacks ETF Rank #2 and a low level of risk.
While movement in interest rates has been a key issue for insurance
companies, build-up of underlying strength will also likely to send
the sector higher. Insurers now have ample liquidity to engage in
Consistent earnings growth and decelerating combined ratios from
most of the primary insurers speak of strengthening fundamentals of
the sector. Thus, investors can easily buy in on the sector to
enjoy the mid-to-long term capital appreciation.
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ISHARS-US INSUR (IAK): ETF Research Reports
PWRSH-KBW IP (KBWI): ETF Research Reports
PWRSH-K P&C INS (KBWP): ETF Research
SPDR-KBW INSUR (KIE): ETF Research Reports
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