Amid all the talk of rising interest rates, investors are quickly learning which segments of the ETF world are vulnerable to higher rates and a stronger U.S. dollar. The utilities trade has been punished as have high-beta international markets, both developed and emerging. Mortgage REIT ETFs have been hit as well and those are just a few examples.
But how about ETFs that benefit from rising rates? Regional bank funds have been identified as one area of potential rising rates profits because net interest margin, or the spread between the average yield on loans and securities investments and a bank’s borrowing deposits costs, has pressured earnings power for regional banks, but a steepening yield curve could limit further NIM downside. [Regional Bank ETFs Could Benefit From Rising Rates]
Insurance ETFs belong in the conversation as well. Analysts at UBS published a report on Wednesday that highlighted several insurance providers as possible winners in an environment where long-term interest rates rise. The list included Lincoln National (NYSE: LNC), MetLife (NYSE: MET) and Unum Group (NYSE: UNM).
UBS has a $37 price target on Lincoln National, which is slightly above where the stock closed Wednesday. The firm has a $31 target on Unum, which is more than 10% above current levels. Unum, a provider of individual disability insurance products, recently raised its dividend 11.5%.
Investors looking to profit from the UBS picks without the need to buy all three stocks can consider the iShares Dow Jones U.S. Insurance Index Fund (NYSEArca: IAK). IAK, which has $114.5 million in assets under management, has gained 19.4% in the past six months. The ETF is home to 66 stocks and its largest holding is American International Group (NYSE:AIG) with a weight of 12.4%. [Storm May Create Headwinds For Insurance ETFs]
Even with the large allocation to AIG, IAK represents a solid avenue for getting exposure to the aforementioned names highlighted by UBS. MetLife is the ETF’s second-largest holding with an allocation of almost 9.4%. Overall, MetLife, Lincoln Financial and Unum combine for 13% of IAK’s weight.
Investors looking for a more balance approach should consider the SPDR S&P Insurance ETF (NYSEArca: KIE). KIE, which has performed roughly inline with IAK over the past six months, is an equal-weight product with individual weights ranging from 2.1% to 2.6%.
As such, the ETF’s exposure to MetLife, Lincoln and Unum is considerably lower than IAK’s. That trio represents about 7% of KIE’s weight. KIE is the less expensive of the two ETFs with an annual expense ratio of 0.35%. IAK charges 0.45%.
iShares Dow Jones U.S. Insurance Index Fund
ETF Trends editorial team contributed to this piece.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.