Financial services exchange traded funds have been getting ample attention recently and investors mulling the segment would do well to not overlook more tactical ensure ETFs, such as the SPDR S&P Insurance ETF (NYSEArca: KIE).
KIE was one of a small amount of ETFs hitting all-time highs last Friday as the financial services group, the second-largest sector weight in the S&P 500, surged.
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. Among industry ETFs that respond positively to rising Treasury yields, perhaps only regional bank funds have been more desperate for rising rates than insurance ETFs.
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.
Among industry ETFs that respond positively to rising Treasury yields, perhaps only regional bank funds have been more desperate for rising rates than insurance ETFs.
Competitors to KIE include the iShares US Insurance ETF (NYSEArca: IAK), PowerShares KBW Property & Casualty Insurance Portfolio (NYSEArca: KBWP) and PowerShares KBW Insurance Portfolio (NYSEArca: KBWI).
Some financial services ETFs have recently touched mutli-year highs, but investors looking for a fund tracking this sector that has made a new all-time high can turn to the First Trust Financial AlphaDEX Fund (NYSEArca: FXO).
Like the other AlphaDEX ETFs, FXO’s holdings are selected based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Said differently, FXO qualifies as a smart beta ETF. While the terminology, and some of the AlphaDEX ETFs’ performances for that matter, have been derided, there is no escaping that FXO has been less bad than traditional financial services ETFs during times of market tumult.
FXO also hit a record high last Friday.
For more information on the insurance industry, visit our insurance category.
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