Until recently, financial services stocks and ETFs lagged other sectors throughout much of 2016, but one of the brightest spots in the group was insurance stocks.
That theme is continuing with the SPDR S&P Insurance ETF (NYSEArca: KIE) recently ascending to new highs.
Impressively, KIE is soaring without the help of a rate hike from the Federal Reserve. 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.
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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.
“The insurance sector generally benefits from higher interest rates. The financial sector as a whole does well because rising rates tend to mean a stronger economy and allow for higher profit margins for the group,” according to ETF Daily News. “There is a correlation between higher rates and performance in financial stocks. And for insurance companies particularly, higher interest rates tend to directly boost their bottom line.”
Since the insurance industry largely targets the domestic economy, a strengthening U.S. dollar will have a lower impact on the sector. Insurance ETFs, sensitive to Treasury yield gyrations in their own regard, are often responsive to rising bond yields.