After struggling to start 2017, the financial services sector has recently gained some momentum. The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector-related ETF, has recently rallied its way to a 7.5% year-to-date gain, but insurance stocks have been steady all of this year.
Just look at the SPDR S&P Insurance ETF (NYSEArca: KIE). That equal-weight ETF is higher by 9.5% year-to-date and hit another record high last Friday. That could be a sign that rising interest rates, as previously expected, are benefiting insurance providers.
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.
In addition, while the Federal Reserve’s rate hikes have helped banks earn more on loans, benefits were partially pared down by declines in long-term rates, with yields on Treasuries falling over the second quarter.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
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.
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).
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KIE, home to nearly $893 million in assets under management, tracks the S&P Insurance Select Industry Index and debuted almost 12 years ago. The ETF holds 50 stocks from the Insurance Brokers, Life & Health Insurance, Multi-Line Insurance, Property & Casualty Insurance, and Reinsurance industries.
The weighted average market value of KIE’s roster is $16.6 billion, according to issuer data. The ETF’s price-to-earnings ratio of 14 implies a significant discount to the broader market.
For more information on the financial sector, visit our financial category.