Fiscal 2011 was a year of series of natural disasters and economic uncertainty which impacted the U.S economy as a whole and insurance industry was not any exception. In order to tackle the economic uncertainty and market turbulence, insurance companies took massive markdowns as a measure to mitigate some effect. (Three Construction ETFs For An Economic Recovery).
Moreover, Insurance industry experienced a major set back in terms of their customer base as getting new customers became difficult in the economy with high unemployment rate where such products don’t catch attraction of the customer due to income uncertainties. Furthermore, investment income also appears to be feeble as insurers are getting substantial low returns on their fixed-income instruments.
Currently the trends in the U.S economy indicate that the U.S insurer industry will be able to strengthen to some extent. However, exposure to real estate front will still continue to be a matter of concern in fiscal 2012. Commercial real estate-backed loans and securities are the areas where life insurers have maximum exposure and which will continue to be a matter of concern.
After going through a year of immense pricing pressure, the U.S Insurance industry has recovered slightly. But, achieving historical growth rates is unlikely at this point of time. We expect static growth from persistent soft market conditions to result in further consolidation in the industry.
The Insurance ETFs did not perform well at the time of market uncertainty but when the market recovers, they are poised to deliver good returns to the investors. The largest 3 funds tracking the insurance industry in terms of market capitalization are SPDR KBW Insurance ETF (KIE - ETF report), iShares Dow Jones U.S. Insurance Index Fund (IAK - ETF report) and PowerShares Dynamic Insurance Portfolio .
SPDR KBW Insurance ETF (KIE - ETF report)
Initiated in November 2005, KIE has been designed to track the performance of S&P Insurance Select Industry Index. The fund has total assets of $159.8 million, highest in the insurance ETF space. With total holdings of 42 stocks, the fund delivered a negative return of 12.17% over a period of one year, impacted by the recession in the economy. With approximately 27% assets in top 10 holdings, the fund’s concentration risk is comparatively low.
In the top 10 holding list, The Hartford Financial Services Group, Inc. (HIG - Analyst Report) takes the top position followed by Lincoln National Corporation (LNC). Property and Casualty takes the top position in terms of divisional holding with 33.96% of asset. The fund has an expense ratio of 35 basis points.
iShares Dow Jones US Insurance Index Fund (IAK - ETF report)
Introduced in May 2006, the fund seeks to replicate the performance of the Dow Jones US Select Insurance Index. The fund has a total holding of 64 stocks with concentration risk of 59.38%, suggesting the fund is not spread out and is highly concentrated in the top 10 companies. MetLife, Inc. (MET - Analyst Report) is the fund’s topmost choice for asset allocation while Property & Casualty Insurance is the top preference in terms of sector allocation.
With total assets of $68.9 million, the fund has delivered a negative return of 7.8%. Investor who has an exposure in the fund needs to pay an 47 basis points for the expense ratio for the fund, the second expensive fund in the insurance ETF space (Three ETFs With Incredible Diversification).
PowerShares Dynamic Insurance Portfolio
PowerShares Dynamic Insurance Portfolio is the oldest ETF in the insurance space and most expensive ETF with 60 basis points of expense ratio. The fund tracks the performance of the Insurance Intellidex Index. PIC has a total holding of 30 stocks with concentration risk of 45.99%.
In the fund's top 10 holdings, Progressive Corp. (PGR) occupies the top position while Prudential Financial, Inc. (PRU).and CNA Financial Corporation (CNA). takes the second and third position. Over a period of 1 year, the fund has delivered a negative return of 5.71%( Five Cheaper ETFs You Probably Overlooked).