As we adjust portfolios in anticipation of higher interest rates ahead, investors may consider including exchange traded funds that track insurance companies.
For instance, investors can use the SPDR S&P Insurance ETF (NYSEArca: KIE), iShares US Insurance ETF (NYSEArca: IAK), PowerShares KBW Property & Casualty Insurance Portfolio (NYSEArca: KBWP) and PowerShares KBW Insurance Portfolio (NYSEArca: KBWI) to capture broad exposure to insurance providers as interest rates rise. [Another Rising Rates ETF Breaks Out]
“Like the broader financials sector, the insurance industry appears attractive,” State Street Global Advisors Vice President and Head of Research Dave Mazza told TheStreet. “If investors believe that long-term interest rates will move higher along with a steepening yield curve, this will be a further boost to insurance stocks. While a steepening yield curve is not our base case, a rate move in 2015 is.”
For instance, yields on benchmark 10-year Treasuries have inched up 18 basis points to 2.35% so far this year. Meanwhile, KIE has increased 6.7%, IAK rose 6.0%, KBWP jumped 10.3% and KBWI advanced 5.0% so far this year.
Moreover, since the insurance industry largely targets the domestic economy, a strengthening U.S. dollar will have a lower impact on the sector.
“The industry has a relatively low amount of foreign sales (31% vs. 43% for the entire S&P 500), which is good for a stronger dollar backdrop,” Mazza added.
KIE, IAK and KBWI are exposed to a range of various market segments, with slight differences.
For instance KIE follows more of an equal-weight methodology where it’s largest component only makes up 2.5% of the portfolio. Additionally, the State Street offering includes a 38.4% position in property & casualty insurance, 23.1% in life & health, 14.3% in multi-line, 14.3% in reinsurance and 9.8% in insurance brokers.
IAK follows a market capitalization-weighted index of broad insurance companies, including a 14.2% tilt toward American International Group (NYSE: AIG), 10.6% in MetLife (NYSE: MET) and 6.7% in Prudential Financial (NYSE: PRD).
KBWI also has a similar large-cap weight, including larger tilts toward MET 8.4% and PRU 8.0%.
Lastly, KBWP focuses on property & casualty insurance providers, such as Chubb Corp (NYSE: CB) 9.3%, Progressive (NYSE: PGR) 8.2% and Travelers Co (NYSE: TRV) 7.5%.
For more information on the insurance industry, visit our insurance category.
Max Chen contributed to this article.