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.
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“Right now, we see a new primary trend, which is the rise of yields. Obviously, rising yields imply that Treasury prices go down. But, more importantly, it will probably put pressure on gold prices. It remains to be seen how commodities will react on this (probably muted) and how stocks will digest this (likely investment risk appetite will rise leading to higher stock prices),” according to ETF Daily News.
Investors looking for solid exposure to insurance stocks without the commitment of a dedicated industry fund, such as IAK or KIE, can consider the First Trust Financial AlphaDEX Fund (NYSEArca: FXO).
“Which sector(s) that are benefiting from the new primary trend? Life insurance companies are outperformers even if stocks are retracing, just like investment services,” reports ETF Daily News.
For more information on the insurance industry, visit our insurance category.
SPDR S&P Insurance ETF
