With many market participants expecting the Federal Reserve to reveal its first interest rate increase of 2017 today, it is not surprising that financial services stocks and exchange traded funds are getting plenty of attention.
Within the financial sector, the second-largest sector allocation in the S&P 500, some groups are more correlated to rising rates than others. Among the potential winners in a rising rates environment are insurance stocks and ETFs such as the SPDR S&P Insurance ETF (NYSEArca: KIE).
Since the insurance industry largely targets the domestic economy, a strengthening U.S. dollar will have a lower impact on the sector. Insurance ETFs, sensitive to Treasury yield gyrations in their own regard, are often responsive to rising bond yields. Among industry ETFs that respond positively to rising Treasury yields, perhaps only regional bank funds have been more desperate for rising rates than insurance ETFs.
A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets.
Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.