Eric Dutram: Leading up to the Q3 earnings season, investors were quite uncertain about the direction of American stocks to close out the year. A great deal of worry is certainly baked into the market thanks to a number of political risks regarding the election and the fiscal cliff, while international market weakness sure isn’t helping matters either.
These worries have been confirmed by some degree of weakness to start the new earnings season as a number of companies have seen weakness in their reports. Thanks to this, the average U.S. focused equity ETF, according to XTF.com, has lost about 2.8% in the trailing one month period, underscoring the negative tone many investors are taking towards the market at this time (read Beware These Three Volatile Financial ETFs).
However, while most segments, and indeed broad market ETFs, are facing a wall of worry, there are still a few standout sectors. Particularly, investors have seen some strength in the financial space as a number of large firms in this corner of the market have posted solid earnings despite the overall market gloom.
Given this strong performance of financials as of late, it could be time to cycle into the space for protection during this difficult time. While a broad look at the sector could be a good idea, a concentrated look at one of the more outperforming segments of the space, insurance companies, could be the best way to go.
In fact, the insurance ETF space has been one of the best performers in the U.S.-centric fund market, crushing many of their competitors in the trailing one month period. According to XTF.com as of October 23rd, of the top seven best performing U.S. ETFs in the trailing one month period, five are insurance ETFs, suggesting that they have been able to, on average, crush broad market performance in this recent market downturn (see Top Three Mortgage Finance ETFs).
With this strength acting as a nice momentum tailwind, and with more uncertainty likely coming down the pike in the near future, insurance ETFs could be the way to go for investors looking to play the American market with ETFs. For these investors, we have briefly highlighted some of the top performing choices in this intriguing slice of the market below:
SPDR S&P Insurance ETF (NYSEARCA:KIE) – This ETF utilizes an equal weight methodology in its strategy, holding 46 securities in its basket and charging a reasonable 35 basis points a year in fees. In terms of yield, the product pays out 1.7% in 30 Day SEC terms, and it receives a Zacks ETF Rank of ‘3’ or hold, with a medium risk rating (read Does Your Portfolio Need a Financial ETF?).
In terms of holdings, the sector profile is skewed towards property and casualty insurance at 40% of assets, while life & health account for another 20% of the fund. Due to the equal weight methodology, the no one security accounts for more than 2.7% of assets, giving the product a very spread out approach for its exposure to the insurance sector.
PowerShares Dynamic Insurance Portfolio (NYSEARCA:PIC) – Another way to target the insurance industry is via PIC and its more ‘dynamic’ approach. The fund utilizes a variety of investment criteria in order to weight and select securities for its fund, resulting in an ETF that has just 30 stocks in its basket but a net expense ratio of 0.67% (see Zacks Top Ranked Financial ETF: Star in Q3 Earnings).
Investors should also note that volume and yield come in on the low side, so the product probably won’t be much of an income destination, especially after fees. However, the fund’s dynamic allocation system could help the product cycle into better stocks and keep the ETF at a lower risk level, assisting the fund in achieving a Zacks ETF Rank of 3 or Hold and a low risk rating.
Dow Jones U.S. Insurance Index Fund (NYSEARCA:IAK) – ETF investors looking for iShares’ entrant in the insurance market should look no further than IAK. This ETF tracks the Dow Jones U.S. Select Insurance Index, holding roughly 60 stocks in its basket and charging investors 47 basis points a year in fees.
The ETF is a little more concentrated, putting close to 60% of assets in the top ten securities and just over 50% in property/casualty insurance firms. The yield is moderate at roughly 1.6% a year, while performance has been solid, putting the fund with a Zacks ETF Rank of ‘3’ or hold, with a medium risk rating.
PowerShares KBW Insurance Portfolio (NYSEARCA:KBWI) – For another PowerShares insurance ETF, investors have KBWI, a fund that utilizes KBW’s methodology in order to focus in on the insurance segment. The product only holds 24 stocks in its basket, and is more of a low cost choice, charging investors just 35 basis points a year in fees (read Three Financial ETFs that Avoid Big Bank Stocks).
The ETF also has a decent mid cap holding, while it is relatively well spread out among its top ten, at least considering the small number of securities in the portfolio. The yield is also relatively good at 1.8% in 30 Day SEC terms, helping to give the ETF a Zacks ETF Rank of 3 or Hold and a low risk rating.
PowerShares KBW Property & Casualty Insurance Portfolio (NYSEARCA:KBWP) – PowerShares teams up with KBW once again for this ETF, except the focus of the fund is solely on property and casualty insurance providers. This results in a basket of roughly 24 stocks and a slightly higher expense ratio of 0.37% to investors.
The portfolio is also heavier in small cap securities, although two large cap names, Travelers (TRV – Analyst Report) and Allstate (ALL – Analyst Report), account for nearly 18% of assets. Investors should also note that the yield is reasonable for this fund at roughly 1.8% in 30 Day SEC terms, while the fund has been one of the best performing of the group in the time frame, adding just over 4.7% for the trailing one month period.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.