Insurance is one of the most resilient industries in the economy. Insurance has been around for a very long time, and should be around for a very long time to come. And the business model could not be better -- mathematics in the house's favor, like a casino.
This is an excellent industry to be exposed to, and ETFs can add an extra mathematical allure, diversifying across a wide number in-the-house's-favor risks. Let's have a look for the best insurance ETFs in the market.
The Amorphous Casino
We'll start our search by screening financial ETFs for insurance pure-plays. There are three:
- SPDR S&P Insurance ETF (NYSEARCA:KIE)
- iShares U.S. Insurance ETF (NYSEARCA:IAK)
- PowerShares KBW Property & Casualty Insurance Portfolio ETF (NASDAQ:KBWP)
The dividends are not too exciting for the insurance ETFs, but they are fully qualified for tax purposes:
SPDR has a good asset base, but the other two funds are on the small side:
All of the expenses are reasonable, and within a tight range:
The yields may not have been exciting, but the performance of the insurance ETFs has been excellent:
Being a sub-sector of finance, it's not too surprising that the funds have relatively few holdings:
Let's take a closer look at each fund.
iShares iNsurance Fund
Let's start with the iShares U.S. Insurance ETF, which is a little more expensive, and has underperformed. This fund tracks the Dow Jones U.S. Select Insurance Index, which provides broad-based exposure to the US insurance industry.
The index is cap-weighted, with the stocks that have the largest float-adjusted market cap being the largest holdings, with a maximum 10% weight. The index is rebalanced quarterly.
The fund consists largely of property & casualty insurers, as well as life & health, multi-line, brokers, and reinsurance:
iShares has done a nice job tracking its index, considering it has been more than a decade since the fund opened:
The fund has performed well, and its expenses are not too bad, but the other two funds are less expensive and have better returns. Let's look at the SPDR fund and see if it is in fact better than this iShares ETF.
Spider Webowners Insurance
The SPDR S&P Insurance ETF tracks the S&P Insurance Select Industry Index. Like the iShares' index, this index provides broad-based exposure to the insurance industry.
This index is equal-weighted and rebalanced quarterly. This is one nice thing the SPDR fund has going for it, as equal-weighting requires more maintenance than cap-weighting. Yet the SPDR fund has lower expenses than the iShares fund.
The SPDR fund is a little more diversified across the insurance industry than the iShares fund, with more broker and reinsurance exposure:
SPDR does a decent job of tracking its index, with the difference being about the size of the expense ratio:
This fund looks a little better all around than the iShares fund. The expenses are lower for more of a service (equal-weighting), it's more diversified across the insurance sub-sectors, its large size makes it more liquid, and its performance is better at every turn. We will indeed drop iShares and endorse the SPDR S&P Insurance ETF.
P&C Insurance is the Ultimate Aphrodisiac
The PowerShares KBW Property & Casualty Insurance Portfolio ETF is a fund after our own heart. We like P&C because it tends to be the most profitable:
Projecting how often cargo will be damaged, workers will be injured, or crops will be wiped out is a much less exact science than trying to project the average remaining natural life span of a large group of people. P&C is harder to underwrite than other types of insurance, and consequently the insurers end up erring on the side of favoring themselves, and raising rates when they are wrong. For this reason, P&C tends to be the most profitable type of insurance.
As we can see from the returns, the PowerShares P&C ETF has indeed beaten the other funds handily.
This fund tracks the KBW Property & Casualty Index, which covers US P&C insurers. The index uses a "modified market capitalization weighted index ", which brings the large stocks like Chubb (NYSE:CB) under 10% weight. The index is re-balanced quarterly.
PowerShares does a good job tracking the index:
With its superb performance and no major flaws, this looks like an excellent insurance ETF. The PowerShares KBW Property & Casualty Insurance Portfolio ETF is a winner.
Insurance is one of the most resilient industries going. It has existed for a very long time, and should be around as long as capitalism is around. The business model of having the mathematics in the house's favor is also very reassuring, especially with risks spread across stocks in an ETF.
The SPDR S&P Insurance ETF is a good way to get broad exposure to the insurance industry for a reasonable price.
The PowerShares KBW Property & Casualty Insurance Portfolio ETF looks like an excellent way to get exposure to the most profitable part of the insurance industry -- P&C. This fund has performed superbly, and given the nature of P&C insurance, should continue to do well for the foreseeable future.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.