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 (NYSEArca: 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 (NYSEArca: 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.