ETF Trends
ETF Trends

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.

Still, the sensitivity of the aforementioned ETFs and their holdings to Treasury yields will continue to figure prominently in the funds’ near-term performance. Consider this: Over the past month, seven of KBWI’s top 10 holdings, a group that combines for over 60% of the ETF’s weight, have traded higher. Two of three stocks that are not are not up over that time are down just 0.16% and 0.2%, respectively.

Despite the obvious weighting differences, IAK and KIE performed nearly in-line with each other in 2013 when Treasury yields soared. S&P Capital IQ rates both ETFs overweight.

Interestingly, investors appear unwilling to commit to the idea that Treasury yields can keep rising. Money has been pulled from KIE and the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the rate-sensitive regional bank ETF this year, while TLT and XLU, which are being pinched by rising Treasury yields, have added over $2 billion in new assets combined. That could be a sign that KIE is a contrarian bet, from a flows perspective, and poised to keep rising in the near-term.

SPDR S&P Insurance ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of TLT.

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.