Even without any help from the Federal Reserve in terms of higher interest rates, rate-sensitive insurance exchange traded funds have been among this year’s most impressive performers from the world of financial services ETFs.
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.
Interestingly, the equal-weight KIE has been one of the best-performing financial services ETFs in recent weeks and has recently been making a series of record highs.
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Financial entities like banks will benefit from expanding margins as rates climb. A rising rate environment may reflect a strengthening U.S. economy, and a healthier economy would help borrowers have an easier time repaying loans, with banks stuck with fewer non-performing assets. Moreover, rising rates means that banks will generate greater revenue from the spread between what they pay deposit savers and the prime rates they charge credit-worthy clients and other highly-rated debt.[related_stories]
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.