Market Overview

Forget Deductibles And Premiums: Look At Insurance ETFs

Forget Deductibles And Premiums: Look At Insurance ETFs

Financial services stocks have been solid performers over the past several months. As much is evidenced by the 2.4 percent returned by the Financial Select Sector SPDR (NYSE: XLF). That is a solid, though not spectacular showing.

Investors looking for some truly impressive showings among financial services ETFs need should look to insurance ETFs. In fact, funds such as the SPDR S&P Insurance ETF (NYSE: KIE) and the PowerShares KBW Property & Casualty Insurance Portfolio (NYSE: KBWP) have been among the small number of sector ETFs that are not staples funds recently making all-time highs.

Related Link: An Idea For Hedging Risk In Emerging Markets Bond ETFs

Over the past three months, KIE, an equal-weight fund, has climbed 6.6 percent. KBWP, oft-overlooked in the insurance ETF conversation has been on a torrid pace, surging almost 10 percent in the past 90 days.

KBWP tracks the cap-weighted KBW Nasdaq Property & Casualty Index. The $26.3 million ETF holds 23 stocks. Chubb Corp (NYSE: CB), Progressive Corp (NYSE: PGR) and Dow component Travelers are the KBWP's three largest holdings, combining for 25.6 percent of the ETF's weight.

Why Are They Overlooked?

Insurance ETFs are overlooked on another front: Their utility at a time when many investors expect the Federal Reserve to imminently raise interest rates. Among financial services, the go-to rising rates plays are regional bank funds, but insurance ETFs deserve some credit for being positively correlated to rising Treasury yields. Simply put, steeper yield curves are advantageous for insurance providers.

That might be one reason investors have pumped about $190.5 million into KIE since the start of the second quarter. Another reason might be insurance ETFs' rising rates advantage is tied to the strong dollar. The stronger greenback affects an array of sectors and industry groups, but not insurance companies because U.S.-based insurance providers write the bulk of their policies here in the US.

Something else to look for with insurance ETFs are rising shareholder rewards. When it delivered quarterly results Monday, American International Group Inc (NYSE: AIG) more than doubled its quarterly dividend to $0.28 per share while boosting its buyback program by $5 billion.

Other insurance giants that have boosted dividends this year include MetLife and Travelers. Along with AIG, those stocks combine for almost 30 percent of the $138.7 million iShares U.S. Insurance ETF (NYSE: IAK). IAK has climbed more than 7 percent over the past 90 days. IAK holds almost 70 domestic insurance companies that focus on life, property and casualty, and full-line insurance coverage.

Image credit: Larry Moore, Wikimedia


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