As the Federal Reserve eyes a tighter monetary policy, investors can look to insurance ETFs that could capitalize on rising rates.
Yields on benchmark 10-year Treasuries have jumped to 2.32% after dipping to 2.0% earlier this month.
Pushing yields higher, many traders anticipate the Federal Reserve to embark on interest rate normalization, with the next major hurdle coming up in December. Supporting the rising rate bets, Philadelphia Fed President Patrick Harker said Friday he still anticipates the central bank to hike rates in December, Reuters reported.
In a speech at his regional Federal bank, Harker said he “penciled in” a December move, along with three more in 2018, putting the Philly Fed president with the majority of central bank officials as the labor market looks robust.
“Labor markets feel really tight,” Harker said at a conference in Philadelphia, adding that it was appropriate for the Fed to take a pause for now in raising rates as it begins to shrink its $4.5 trillion balance sheet.
Low inflation, though, is a concern, especially since the Fed may be under-estimating productivity, so it may also be over-estimating inflation.
Nevertheless, Federal Reserve Chair Janet Yellen is optimistic that inflation will turn around. Yellen, speaking in Cleveland to the National Association for Business Economics, said “low inflation likely reflects factors whose influence should fade over time,” Bloomberg reports. While the Fed’s understanding is “imperfect,” the uncertainty “strengthens the case for a gradual pace of adjustments” in interest rates, Yellen added.
With the markets look toward higher rates, the insurance industry can capitalize on wider margins. The industry has previously been suffering from spread compression on products like universal life and fixed annuities due to the stubbornly low rate environment. With greater investment income, insurers see conditions improve as rates rise.
ETF investors can also capitalize on a stronger insurance segment through targeted ETF plays, such as the SPDR S&P Insurance ETF (NYSEArca: KIE), iShares US Insurance ETF (NYSEArca: IAK) and PowerShares KBW Property & Casualty Insurance Portfolio (NYSEArca: KBWP).
KIE follows more of an equal-weight methodology where it’s largest component only makes up 2.5% of the portfolio. IAK follows a market capitalization-weighted index of broad insurance companies, including a 9.2% tilt toward Chubb (NYSE: CB), 7.8% to American International Group (NYSE: AIG) and 7.8% MetLife (NYSE: MET). Lastly, KBWP focuses on property & casualty insurance providers, such as Progressive Corp 8.2%, Arch Capital Group 8.1% and Travelers Cos 8.1%.
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