With five months of 2011 in the books, the year has already been quite memorable in the extreme weather department, both in the U.S. and abroad. Strong snowstorms in the early part of the year soon gave way to massive flooding across the Mississippi River area, before heavy storms caused tornadoes to break out across much of the Midwest and left widespread devastation in Missouri and Alabama. Estimates for damage already top $15 billion so far this year, a total that exceeds several recent annual totals.
Against this backdrop, many investors are nervously eying the beginning of another season that has a history of causing extreme weather conditions. For many, June 1 marked the unofficial start of the summer driving season, and the beginning of a summer slowdown. It also marks the start of hurricane season, which begins with June and runs through the end of November. Hurricane forecasts are notoriously inaccurate, so it might not be a good idea to put a lot of stock in early prognostications. But the initial forecasts are somewhat disconcerting; many are expecting a rough hurricane season. Changing currents and warm water in the ocean are just two of the factors that are pushing many analysts to predict that a very active stretch of hurricanes is ahead. The NOAA recently released a report that predicted that the number of named storms could reach between 12 and 18 in total, with a strong chance of at least five of these becoming major hurricanes. Forecasters at Colorado State University are giving East Coast residents a 48% chance of seeing a major hurricane make landfall this year,vs. 31% in a typical year.
As we have seen in the case of Japan, Mother Nature can throw a wrench into any business plan or investment portfolio, introducing risk factors that are difficult to predict in advance with any amount of accuracy. While betting on the impact of natural disasters on various asset classes is similar to gambling on a football game, there are opportunities for investors concerned about adverse developments to protect themselves. Though the impact of natural disasters is often felt throughout an economy, some sectors and assets are impacted more than others. Below, we profile a handful of ETFs that could be impacted by the severity of the upcoming hurricane season.
United States Natural Gas Fund (UNG)
Although a great deal of natural gas is produced in wells in the central part of the country, much of the nation’s natural gas production and pipeline paths lie in the heart of many hurricane paths in the Gulf of Mexico. Hundreds of rigs that develop gas fields have to be shut down whenever a storm breaks out in the region, cutting supplies of the popular fuel and simultaneously boosting prices of natural gas - and natural gas ETFs - in the process. In fact, close to 10% of the nation’s natural gas supply comes from this region, while another third comes from onshore states that are along the Gulf Coast. As such, if a hurricane hit the right spot it could cripple production of natural gas in the country for at least a few days. If this happens, UNG would likely surge in the process. However, the fuel is likely to be extremely volatile, and any changes in landfall predictions or intensity are likely to have a huge impact on this product heading into this crucial season. Moreover, UNG is designed to appeal primarily to those making a short-term play; contango in natural gas markets can create a drag in a fund that rolls holdings on a monthly basis.
PowerShares KBW Property and Casualty Insurance Portfolio (KBWP)
Insurers, and especially those with international operations heavy in exposure to the Pacific Rim, have been hard hit this year and are already on the hook for billions in payments. Unfortunately for many of these firms, hurricane season is always an active period that potentially brings billions in additional claims, since the more destructive types of storms tend to cover a wide area and pack a powerful punch. KBWP offers exposure to a sub-sector of the financial market, but this fund is essentially a way to bet on hurricane season. The component companies include many of the firms that would be on the hook for hefty bills if hurricane season is particularly violent - or could post huge profits if property damage is minimal. KBWP consists of about 24 individual stocks, including The Travelers Companies (TRV), Chubb Corp. (CB) and Allstate (ALL). This fund doesn’t have a huge asset base or average daily volume, so investors considering a position should utilize limit orders to ensure smooth execution.
Homebuilders SPDR (XHB)
If a major storm does make landfall, investors in XHB could see a moderate boost - not unlike what we saw for the building and construction industry directly after the quake in Japan in mid-March. This is because demand for new homes, businesses, and equipment is likely to surge immediately following a disaster, forcing communities in the impacted region to devote large amounts of resources to these companies in order to restore buildings and infrastructure. XHB is one of several ETFs offering exposure to the building industry, and is somewhat unique because it seeks to replicate an equal-weighted index. As such, XHB avoids concentrations in any one stock, and avoids some of the potential pitfalls that may plague other ETFs in the Building and Construction ETFdb Category.
Disclosure: No positions at time of writing.
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