XLF Financial Select Sector

After driving earnings for many quarters, the financial sector has been a major drag on total Q1 earnings growth. This is especially true as financials is the second-worst performing sector this earnings season, trailing autos.

Total earnings for 100% of the sector’s total market capitalization are down 7% with a lower beat ratio of 64.6%. Revenues are also down 14% year over year with a beat ratio of 54.4%. The weakness can mostly be blamed on sluggish results from big U.S. banks (read: 3 ETF Winners from Earnings Season).

Despite disappointing earnings, one corner of the broader financial segment – insurance – is performing quite well than the others. Most of the insurers reported gloomy revenue numbers missing our estimate, while earnings seem quite inspiring. This is primarily thanks to a string of earnings beat by some of popular names such as American International (AIG), Prudential Financial (PRU), Aflac Inc. (AFL) and Travelers (TRV).

However, MetLife (MET) and Allstate (ALL) reported lackluster earnings and Chubb Corp (CB) met earnings estimate.

Insurance Earnings in Focus

MetLife, the U.S. life insurer behemoth, missed the Zacks Consensus Estimate by 3 cents and deteriorated 7% from the year-ago quarter. On the other hand, PRU, the second-largest U.S. life insurer, surprised the market with a strong earnings beat of 13 cents and 5.7% year over year improvement.

Aflac, the seller of supplement health insurance, topped our earnings estimate by a penny and saw no change from the year-ago earnings. The largest commercial insurer in the U.S. and Canada – AIG – also reported strong earnings. Though earnings per share of $1.21 surpassed the Zacks Consensus Estimate of $1.08, the figure was below the year-ago earnings of $1.34 (read: 3 ETFs to Profit from the Hot Insurance Industry).  

One of the largest property and casualty insurers and an industry bellwether, Travelers, posted record earnings of $2.95 per share, strongly beating Zacks Consensus Estimate of $2.13 and improving from the year-ago earnings of $2.33.

Though earnings at another property and casualty insurer – Chubb - managed to meet our estimate of $1.50, the figure showed a 30% year-over-year decline thanks to severe winter. Allstate, personal property and casualty insurer, lagged the Zacks Consensus Estimate by 14 cents and the year-ago earnings by a nickel.

Insurance ETFs in Focus

Based on decent earnings, insurance ETFs are leading the financial ETF space in the trailing one-month period. Investors looking to gain exposure to this corner of the market segment in a diversified way may consider the following ETFs (see: all the Financial ETFs here).

SPDR S&P Insurance ETF (KIE)

This fund follows the S&P Insurance Select Industry Index and offers equal weight exposure across 51 stocks, suggesting no concentration risk. None of the securities holds more than 2.39% of total assets. About two-fifths of the portfolio is allocated to the property and casualty insurance sector while life & health insurance accounts for another one-fifth share.

The ETF has managed $271 million in its asset base so far and trades in good average daily volume of 136,000 shares. The product has an expense ratio of 0.35% and added about 2.9% over the past one month. The ETF has a Zacks Rank of 2 or ‘Buy’ rating with Medium risk outlook.

iShares U.S. Insurance ETF (IAK)

With AUM of $152.8 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 45 bps in annual fees. Volume is light, trading in about 28,000 shares per day. In total, the fund holds 66 securities in its basket with the largest allocation to American International at 12.25%, closely followed by Metlife at 9.27%. Other firms do not hold more than 6.39% of assets.

Here again, property and casualty insurance takes the top spot, accounting for half of the asset base. Life insurance and full time insurance take the remaining portion in the basket. The fund moved up nearly 3% over the trailing one month and has a Zacks Rank of 1 or ‘Strong Buy’ rating with Medium risk outlook (read: Should You Buy Insurance ETFs Now?).

PowerShares KBW Property & Casualty Insurance Fund (KBWP)

This overlooked ETF provides targeted exposure to the property and casualty insurers by tracking the KBW Property & Casualty Index. Holding 24 securities, the fund has a slight tilt toward Allstate, Travelers and Chubb that collectively make up for 24.19% of total assets.

Though property and casualty insurance accounts for 66% share, reinsurance and multiline insurance also receive double-digit exposure in the basket. The product has amassed just $9.6 million in AUM and trades in small volumes of just 4,000 shares per day on average. The ETF charges an annual fee of 35 bps and returned nearly 4.5% in the last one-month period. KBWP has a Zacks Rank of 2 with Medium risk outlook.

Bottom Line

Investors should note that these products have clearly outpaced the broad sector fund (XLF) and the market fund (SPY) by a wide margin. This outperformance is expected to continue in the coming months on concerns over rising interest rates, which would enable them to earn more premium on their investment portfolio (read: Play Rising Rates with These ETFs).

Further, recovering economic health and an improving labor market are driving higher demand for all types of insurance services, leading to strength in this segment. Moreover, upside to the sector could be confirmed by the Zacks Industry Rank, as four out of five insurance industries have a solid rank (in the top 42%) at the time of writing.

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ISHARS-US INSUR (IAK): ETF Research Reports
 
PWRSH-K P&C INS (KBWP): ETF Research Reports
 
SPDR-KBW INSUR (KIE): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
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