Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the insurance industry to thrive over time, the SPDR S&P Insurance ETF (NYSE: KIE ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The insurance ETF's expense ratio -- its annual fee -- is a relatively low 0.35%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has outperformed the world market over the past three years, but underperformed it over the past five. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 9%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several insurance companies had strong performances over the past year. Cincinnati Financial (Nasdaq: CINF ) , for example, surged 42%. Yielding 4.3% recently, it has a dividend-hiking history of more than 50 years. It has warned that its upcoming earnings will take a hit due to two recent storms in the Midwest and Mid-Atlantic states, and it should also be of interest that unlike many of its peers, it has about a quarter of its assets in stocks, presenting somewhat more risk but also potentially greater returns.
Marsh & McLennan (NYSE: MMC ) , up 14%, has been boosting its cash position and reducing its debt load in recent years, and while revenue and earnings growth has been a bit lumpy, the past year featured some estimate-beating results and strong growth in its Latin American operations. It has been buying smaller companies, too, to fuel growth.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Prudential (NYSE: PRU ) shed 17%, partly due to derivatives-related losses, but it holds plenty of promise, particularly from its fast-growing business in Asia. (Asia generated 30% of the company's profits last year.) Prudential recently halted selling group long-term-care insurance.
AFLAC (NYSE: AFL ) , meanwhile, stayed flat. With respected management, it sports a different business model, selling its insurance largely through employers. It also has focused mainly on Japan, where customer loyalty is high, and where it commands steep market shares. The stock seems undervalued now to many, partly due to troubles in Europe.
The big picture
Demand for insurance isn't going away anytime soon, because the risks we face aren't going away. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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