Thanks to the ultra-low interest rates environment, the insurance industry has been lagging the overall market and the broader financial space so far this year. This is because low rates dampened insurers’ profits by lowering returns – major income sources – on their investment portfolios.
However, the insurance companies are benefiting from longer-dated bonds as the value of these bonds is rising with falling yields. The trend is likely to continue in the coming months as the Fed continued to keep interest rates at lower levels for a considerable period of time even after the QE wrap-up. This would lead to a further fall in the bond yields and a rise in bond price.
The sector is poised to profit from improving economic activities across the globe amid escalating turmoil in Iraq and growing tensions in Russia. After being stressed by brutal weather conditions in the first quarter, latest economic indicators related to manufacturing, servicing, housing, employment and consumer confidence point to a strong recovery. All these would lead to higher demand for all types of insurance services (read: Should You Buy Insurance ETFs Now?).
Further, investors should note that the upside to this industry is confirmed by the Zacks Industry Rank, as three out of five insurance industries actually have a solid Rank at the time of writing. Property/casualty has a Zacks Rank in the top 11% while two other segments – accident/health and brokers - have Ranks in the top 40%. This suggests smooth trading in this corner of the financial market over the coming months.
Given the optimistic outlook, a good way to seek entry into the insurance world is by tilting toward companies in this segment. While there are a number of ways to invest in this corner of the market, a look at the top ranked ETF could be an excellent play. One way to find a top ranked ETF in the insurance space is by using the Zacks ETF Rank system (see: all the Financial ETFs here).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
Using this strategy, we have found one ETF – iShares U.S. Insurance ETF ((IAK - Free Report) ) – that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (see: all the Top Ranked ETFs).
IAK in Focus
This ETF provides exposure to the insurance segment of the broader U.S. financial sector by tracking the Dow Jones U.S. Select Insurance Index. In total, the fund holds a basket of 67 securities and charges 46 bps in fees per year from investors.
The product is heavily concentrated on the top two firms – American International (AIG) and Metlife (MET) – with a combined 25% share. Other firms do not hold more than 7.23% of assets. It has a certain tilt toward large cap and value stocks as about two-third of the portfolio falls in the large cap category while about 97% of it is classified as value (read: 3 Top Ranked Value ETFs to Buy Now).
A combination of large cap value securities has the potential to deliver higher returns and reduce overall volatility in the portfolio. In addition, these securities tend to outperform when considered on a long-term investment horizon and are less susceptible to trending markets. As such, these provide safety and could be the perfect choice for investors concerned about lower interest rates and its negative impact on the sector.
Within the insurance sector, property and casualty insurance takes the top spot, accounting for less than half of the asset base while life insurance and full-time insurance take the remaining portion.
In terms of performance, IAK added just 2.9% year-to-date, easily underperforming the broad financial fund (XLF - Free Report) and U.S. market fund (SPY - Free Report) by wide margins. However, the ETF is leading the financial space from a long-term perspective given returns of 61.6% over the trailing three-year period and 150.5% over the past five years (read: 5 Best Performing ETFs of the 5 Year Bull Run).
The fund has so far accumulated only $139.1 million in its asset base and is often overlooked by investors as depicted by its small volume of roughly 24,000 shares per day. This suggests that bid/ask spreads are relatively wide and that total costs may be higher than the expense ratio.
Given that the sector is yet to see strength in the coming months on improving global economic conditions, investors should definitely take advantage of the weak stock prices by investing in this top ranked ETF.
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