With 10-year Treasury yields climbing another 2% Friday, extending the benchmark government bond yield’s rise to 18.6% since Jan. 30, plenty of attentions is being paid to the vulnerability of rate-sensitive asset classes.
Most of that attention is devoted to asset classes and exchange traded funds that are adversely affected by rising Treasury yields. Think real estate investment trusts (REITs), the utilities sector and, of course, longer dated government bonds.
Indeed, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and the Utilities Select Sector SPDR (NYSEArca: XLU) were among 2014’s top-performing ETFs as Treasury yields sank, but if the recent spike in yields has more room to run, investors should consider industry ETFs that stand to benefit from higher rates.
Enter insurance ETFs. 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 Breakout for Regional Bank ETFs]
When 10-year yields tumbled last year, the SPDR S&P Insurance ETF (NYSEArca: KIE) rose just 7.7%, barely more than half the returns offered by the Financial Select Sector SPDR (NYSEArca: XLF). With yields rising, the trend of insurance stocks lagging is reversing.
Since yields started moving higher in late January, KIE, an equal-weight ETF, is up 7.1% while the cap-weighted iShares US Insurance ETF (NYSEArca: IAK) is higher by 6.3%. The PowerShares KBW Insurance Portfolio (NYSEArca: KBWI) is higher by nearly 5% over that period. The reason: Insurance companies make profit from spreads between what they owe policyholders and bond yields. The higher the Treasury yield, the better for insurance providers. [Insurance ETFs Wait on Higher Rates]
Even with lower interest rates, insurance companies have been able to manage earnings in solid fashion, providing investors with a fair amount of the financial services sector’s recent earnings surprises.