Bank on Financial ETFs in Rising Rate Environment

However, KRE follows a more equal-weight methodology, which makes the fund lean toward small- and mid-cap regional banks. On the other hand, IAT tracks a cap-weighted methodology, including a hefty 17.4% position in US Bancorp (NYSE: USB) and 11.3% in PNC Financial Services (NYSE: PNC), so the iShares offering also includes a bigger tilt toward mega- and large-cap names. KBWR’s undelrying index also has an equal-weighted market-cap methodology and takes a bigger position in small-caps than its competitors.

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Furthermore, within the financial space, insurance companies will also capitalize on rising interest rates. Insurance stocks have typically exhibited a positive correlation with interest rates where higher rates have translated to higher growth. Along with generating greater revenue through new higher yielding debt holdings in a rising rate environment, insurers may also capitalize on a healthier economic environment as consumers purchase big-tick items and buy a home, which may mean more insurance policy coverage.

A broad financial sector ETF may include some insurance exposure – XLF has 16.6% in insurance, but investors can also consider insurance sector-specific ETFs. ETF investors can use the SPDR S&P Insurance ETF (NYSEArca: KIE), iShares US Insurance ETF (NYSEArca: IAK) and PowerShares KBW Property & Casualty Insurance Portfolio (NYSEArca: KBWP) to capture broad exposure to insurance providers as interest rates rise.

KIE follows more of an equal-weight methodology where it’s largest component only makes up 2.8% of the portfolio. Additionally, the State Street offering includes a 39.5% position in property & casualty insurance, 24.9% in life & health, 12.4% in reinsurance, 11.7% in multi-line and 11.4% in insurance brokers.

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IAK follows a market capitalization-weighted index of broad insurance companies, including a 11.4% tilt toward American International Group (NYSE: AIG), 10.2 Chubb (NYSE: CB) and 8.8% MetLife (NYSE: MET).

Lastly, KBWP focuses on property & casualty insurance providers, such as Chubb Corp (NYSE: CB) 8.2%, Allstate 8.0% and Travelers Co (NYSE: TRV) 7.8%.

For more information on the Banks ETF market, visit our Banks category.