However, small caps dominate the fund’s return at 65%. The fund added about 1.14% in the past five trading sessions (as of March 10, 2015) versus 0.9% loss in ultra-popular Vanguard
Financials ETF (VFH).
However, investors should note that KRE is a Zacks ETF #4 (Sell) ranked product and is likely to underperform when the Fed actually hikes short-term rates. Long-term bonds would then enjoy demand among the Euro zone and Japanese investors due to their drive for higher income that should squeeze the yield spread.
Insurance companies would benefit from rising interest rates, as these are able to earn higher returns on their investment portfolio of longer-duration bonds. At the same time, these firms incur loss as the value of longer-duration bonds goes down with rising interest rates.
Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized.
Investors could easily tap the sector with iShares U.S. Insurance ETF (IAK), which amassed $134 million in its asset base and sees light volume of around 18,000 shares a day. The fund charges 43 bps in annual fees. The product holds 65 stocks in its basket with considerable company-specific concentration risks.
Though IAK lost about 0.2% in the last five trading sessions, it is a Zacks ETF #2 (Buy) ranked product and is likely to outperform post Fed tightening. The fund was up 2.6% in the last one month.
Broad Financial ETFs
Investors seeking broad exposure to the financial sector could find this overlooked ETF iShares U.S. Financial Services ETF (IYG) an interesting choice. This product holds 112 stocks in its basket. Banks take the top spot at 55% from the sector look while other financial services make up for the remainder.
IYG has amassed $593.2 million in its asset base and trades in a lower average daily volume of about 60,000 shares. It charges an annual fee of 43 bps from investors. The fund lost about 0.4% in the last five trading sessions while it is up 2.4% in the last one month.
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