What Is an Insurance Industry ETF?
An insurance industry ETF is an exchange-traded fund (ETF) that aims to generate returns equal to an underlying index of insurers.
An insurance ETF invests in all types of insurers, includingproperty and casualtyinsurers,life insurancecompanies, full line insurers, and insurance brokers. Depending on its mandate, such an ETF may also hold international insurers, or be restricted to domestic insurance companies only.
Key Takeaways
- An insurance industry ETF is an exchange-traded fund (ETF) that aims to generate returns equal to an underlying index of insurers.
- They invest in all types of insurers, and, depending on their mandate, might also hold overseas securities.
- Insurance stocks are considered defensive investments due to the relative stability of their business models.
- They do have a tendency to be cyclical, though, rising and falling with the economic cycle.
Understanding an Insurance Industry ETF
ETFs, short forexchange-traded funds, are a collection of securities that track an underlyingindex. They are similar to mutual funds but are listed on exchanges and trade throughout the day just like ordinary stock.
Some ETFs seek to replicate the performance of the broader equity market. Others have a narrower focus, specializing in stocks and securities of a specific sector—a goal made possible thanks to the proliferation of industry indexes for them to track.
Insurance stocks, one of several industries or sub-sectors within financial services, are considered defensive investments due to the relative stability of their business models. These companiesoffer protection or reimbursem*nt against financial losses to clients in exchange for a monthly charge, known as a premium.
Based on their analysis of the odds of a disaster and the many other risks related to the type of coverage they offer, insurers end up making few large payouts to cover claims. That enables them to pocket the majority of customer premiums, which are reinvested to generate an income. A portion of this income is then shared with shareholders in the form of dividends.
Important:
Insurance companies chargepremiumsin exchange for coverage, thenreinvest those premiumsin otherinterest-generatingassets.
Example of an Insurance Industry ETF
There are three insurance industry ETFscurrently available to investors, according to etfdb.com. The biggest of the bunch, the SPDR S&P Insurance ETF (KIE), has roughly $460 million in assets under management (AUM).
KIE’s goal is to track the performance of the S&P Insurance Select Industry Index. However, unlike some of its peers, the fund doesn’t intend to purchase all the securities represented in its benchmark, preferring instead to buy a sample of them—under normal conditions, KIE claims to generally invest at least 80% of its total assets in the securities comprising the index.
As of Sept. 30, 2022, the ETF reported 51 holdings, with each company, large or small, making up 2% of its portfolio. KIE’s equal-weighting scheme and narrower stock universe means it differs slightly from its benchmark. It has a penchant for underweighting property and casualty insurance in favor of a larger exposure to reinsurance companies, though still aims to ensure that the securities it holds generally reflect the same risk and return characteristics of the index it tracks.
KIE carries an expense ratio of 0.35%, slightly below the average ETF charge of 0.44%. That means the fund charges $3.50 in annual fees for every $1,000 invested.
Advantages and Disadvantages of an Insurance Industry ETF
Insurance industry ETFs generally offer investors the same benefits as traditionalexchange-traded funds, including low expense ratios, flexibility, decent liquidity, and tax efficiency. They are traded on most major exchanges during normal trading hours andsupportselling short or buying on margin.
One of the biggest advantages of ETFs is diversification. They offer immediate exposure to a variety of companies, helping investors to reduce company-specific risk. Considering that insurance stocks are historically among the best performers within the financial industry, gaining broad access to the sector might be appealing.
Still, as is the case with any investment, ETFs aren’t without risk. Investors are advised to pay careful attention to expense ratios, to ensure that costs don’t eat too much into returns, and develop a clear understanding of each ETF’s mandate, relationship to its underlying index and the type of securities it holds. Insurance companies aren’t all the same. Each can specialize in different types of the market and some aren’t as good as underwriting, the process of evaluating risks and pricing them accordingly, as others.
Cyclical
It’s also worth bearing in mind that insurance stocks are generally susceptible to many of the same cyclical forces that affect other financial companies. Insurance indexes and ETFs based on them reached multi-year lows in the financial crisis of 2008. They then participated in the market rally that commenced in 2009 and were among the top performers after the 2016 presidential election that was led bycyclical stocksand those positioned to benefit from industry deregulation.
FAQs
An insurance industry ETF is an exchange-traded fund (ETF) that aims to generate returns equal to an underlying index of insurers. An insurance ETF invests in all types of insurers, including property and casualty insurers, life insurance companies, full line insurers, and insurance brokers.
What is an ETF in insurance? ›
Exchange-Traded Funds (ETF) Last Updated 4/3/2023. Issue: Exchange-traded funds, commonly referred to as ETFs, are an investment product that insurance companies can buy that combines the investment characteristics of a mutual fund with the trading characteristics of stock shares.
What does a ETF stand for? ›
Exchange-traded funds (ETFs) are an easy way to invest. A way that tends to have low upfront cost, that is flexible yet also simple, transparent and easy to trade. Learn what ETFs are and how they can make your money do more for you minus the relative complexity of many traditional investment products.
What does ETFs mean for dummies? ›
An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.
What is the difference between a fund and an ETF? ›
With a mutual fund, you buy and sell based on dollars, not market price or shares. And you can specify any dollar amount you want—down to the penny or as a nice round figure, like $3,000. With an ETF, you buy and sell based on market price—and you can only trade full shares.
What are the benefits of ETF? ›
ETFs have several advantages over traditional open-end funds. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits.
How do ETFs make money? ›
Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.
Why is ETF not a good investment? ›
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Why ETFs are good for beginners? ›
Exchange traded funds (ETFs) are ideal for beginner investors due to their many benefits such as low expense ratios, abundant liquidity, range of investment choices, diversification, low investment threshold, and so on.
Is ETF a good or bad investment? ›
ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.
Are ETFs good for beginners? ETFs are great for stock market beginners and experts alike. They're relatively inexpensive, available through robo-advisors as well as traditional brokerages, and tend to be less risky than investing individual stocks.
What are 3 disadvantages to owning an ETF over a mutual fund? ›
So it's important for any investor to understand the downside of ETFs.
- Disadvantages of ETFs. ETF trading comes with some drawbacks, which include the following:
- Trading fees. ...
- Operating expenses. ...
- Low trading volume. ...
- Tracking errors. ...
- Potentially less diversification. ...
- Hidden risks. ...
- Lack of liquidity.
Since ETFs are more diversified, they tend to have a lower risk level than stocks. Similar to stocks, ETFs can be bought and traded at any time and they are also taxed at short-term or long-term capital gains rates.
How do ETFs work? ›
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
What is ETF and its benefits? ›
They enable arbitrageurs to carry out arbitrage between the Cash and the Futures markets at low impact cost. ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock.
What is an ETF good for? ›
ETFs have several advantages over traditional open-end funds. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits.
Is an ETF a covered security? ›
ETFs are structured as either an open-end fund or a unit investment trust. The SEC's response in a no action letter was that the open-end fund variety is not a reportable security and the UIT variety is a reportable security. Is the UIT variety of ETF rare enough that you don't need to worry about them? No.
How does ETF expense work? ›
An ETF expense ratio tells an investor how much they'll pay over the course of a year to own the fund. For example, if an ETF expense ratio is 0.20%, the investor's cost to hold the fund for a year is $20 for every $10,000 invested.
