Exchange-traded funds (ETFs) are investments that group together things like sectors or commodities. Insurance industry ETFs allow investors to participate in the stocks of insurance companies. These companies could sell various types of insurance, such as life, home, and business insurance. They can also include companies that help customers in buying insurance.
One advantage of insurance industry ETFs is that they allow investors to focus on one sector without purchasing many different stocks from that industry. ETFs allow you to quickly invest in an entire industry with a single investment, spreading out your investments while managing risk.
Insurance Industry ETFs Explained
Exchange-traded funds (ETFs) are a group of investments that follow a specific index. They are similar to mutual funds, except they are listed on stock exchanges and can be traded all day like regular stocks.
Some ETFs aim to copy the performance of the entire stock market. Others focus on specific areas, such as a particular industry. This is possible since there are now numerous special indexes for them to follow.
Insurance companies are part of the bigger financial services industry. Because of their regular business practices, these companies are regarded as safer investments. They provide financial protection or money back if bad things happen, such as accidents, in exchange for a monthly premium. This allows these companies to keep most of the money they receive, which they then invest to make even more money. Some of the additional money is distributed as dividends to shareholders.
Best Insurance Industry ETFs 2023
There are three best insurance ETFs in 2023 available to investors.
SPDR S&P Insurance ETF (KIE)
The SPDR S&P Insurance ETF tracks the S&P Insurance Select Industry Index and typically invests more than 90% of its total assets in securities from that index. It owns companies such as First American Financial Group, Hanover Insurance Group, Chubb Corporation, and Travelers, all of which are part of the index. This fund has been in the market since November 2005 and has $436.71 million in assets under management (AUM). KIE has an expense ratio of 0.35%, which is slightly lower than the average fee for ETFs of 0.44%. This indicates that for every $1,000 invested, the fund charges $3.50 in annual fees.
iShares U.S. Insurance ETF (IAK)
The iShares U.S. Insurance ETF is a fund that follows a benchmark composed of equities from the American insurance sector. It represents companies like Prudential, MetLife, AIG, and Travelers. While most companies in this insurance industry fund cover property and casualty insurance, it also includes life and full-line insurance. Since May 2006, IAK has been available for trade.
Invesco KBW Property & Casualty Insurance ETF (KBWP)
KBWP invests in companies such as Travelers, Allstate, Progressive Corporation, and Chubb Corporation and follows the KBW Property & Casualty Index. Both the ETF and the index comprise approximately twenty stocks. Since 2010, KBWP has been available for trade.
These insurance industry ETFs provide additional benefits in addition to exposure to the insurance sector, such as potential tax advantages. Because ETFs involve fewer trades, investors can manage when they owe taxes on any profits they make from selling their ETFs.
Advantages and Disadvantages of Insurance Industry ETFs
Advantages of Insurance Industry ETFs
Insurance industry ETFs offer various benefits similar to traditional exchange-traded funds (ETFs). These include low expenses, flexibility, good trading availability, and tax advantages. During regular trading hours, they can be bought and sold on major exchanges, and you can even sell them short or buy them with a margin.
Diversification is one of ETFs' main advantages. They provide you with immediate exposure to several companies, reducing the risk associated with the performance of any single company. Insurance companies have typically outperformed the financial sector, so gaining broad access to this sector may be appealing.
Disadvantages of Insurance Industry ETFs
ETFs, like any investment, come with their own set of hazards. It is important to carefully look at expense ratios to ensure that fees do not impact your returns. You should also understand the goal of an ETF, how it relates to its underlying index, and what kind of securities it holds. Not all insurance companies are the same—they may specialize in different market areas, and some may be less proficient than others in evaluating risks and appropriately pricing them, a process known as underwriting.
Cyclic Nature of Insurance Industry ETFs
Insurance industry stocks are affected by the same cyclical trends that affect other financial firms. Insurance ETFs and indexes linked to them experienced massive declines during the 2008 financial crisis. However, they rebounded during the market surge that began in 2009 and emerged as strong performers following the 2016 presidential election. This election boosted cyclical stocks and those expected to benefit from industry deregulation.
The Bottom Line
Though ETFs have advantages, they also have risks. Before making any trades, do some research on each fund. See how they respond to various market situations and understand why certain companies were included in the fund. If you have any doubts about your investment, ask a financial expert, such as a financial advisor or broker.
