Taking many investors and analysts by surprise, interest rates in the U.S. have moved southward this year despite the initiation of QE taper. Persistently soft job growth, housing start as well as the fear of a gradual cease in cheap dollar inflows thanks to the QE taper and the resultant emerging market lull encouraged risk-loathing investors to flock to safe haven U.S. government debt.
Also, the slowdown in the world’s second largest economy, China, and the escalating turmoil in Ukraine bolstered the demand for safe haven assets pushing yields lower. While this has spread cheer in the market, some sectors like insurance were hit hard.
This is because most insurance companies, in particular life insurance, invest in longer-duration bonds, which enable them to earn more on their investment portfolios from higher interest rates. Although, the value of the bonds keep tanking with rising rates, holding the security until maturity rewards investors with the face value price, leading to no material loss for bondholders (read: A Comprehensive Guide to Insurance ETFs).
However, the present interest rate scenario is following an opposite trend with long-term interest rates falling more steeply than the shorter ones. In the first two months of the year, yield on the 10-year Treasury note slipped 11.3% in the year-to-date frame while yields on the one-year Treasury note dipped 7.7%. This has weighed on the insurance industry lately, though many have rebounded to start March.
Is it a good entry point?
Probably yes. With the Fed seems steadfast in curtailing its massive monetary stimulus, rates are likely to rise in the coming days. Though higher demand for government bonds has kept the interest rates under control for now, the scenario is unlikely to persist when the bond buying spree bottoms out. Further, a scale-back in QE means stronger economic growth which will lead to higher demand for various insurance services.
Given this bullish outlook, the recent dip can very well serve as a buying opportunity. Thus, a look at some of the ETFs in the insurance industry could be a good way to target the best of the segment with lower levels of risk. In this space, any of the ETFs can prove to be a prudent choice as all are buy-ranked options.
SPDR S&P Insurance ETF (NYSEARCA:KIE)
Launched in November 2005, KIE looks to track the performance of the U.S. insurance stocks. The ETF has assets worth $294.8 million, and the product holds 51 securities with an equal weighted approach. The product charges a reasonable 35 basis points per year in fees (read: Inside The Top Ranked Insurance ETF).
In terms of holdings, over 38% of the assets are invested in the property and casualty insurance sector followed by 22.6% holdings in life & health insurance. Due to the equal-weight methodology, no stock accounts for more than 2.49% of the basket. The fund carries a Zacks ETF Rank #2 (Buy) and a medium level of risk.