What is an Insurance Industry ETF
An insurance industry ETF is an exchange-traded fund that invests primarily in insurance companies to obtain investment results that closely track 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. Depending on its mandate, such an ETF may also hold international insurers, or may be restricted to domestic insurance companies only.
BREAKING DOWN Insurance Industry ETF
Since companies in an insurance industry ETF are a part of the financial services sector, insurance stocks are susceptible to many of the same cyclical forces that affect other financial companies. For example, insurance indexes and ETFs based on them reached multi-year lows in the financial crisis of 2008 but participated in the market rally that commenced in 2009 and were also among the top performers after the 2016 presidential election that was led by cyclical stocks and those positioned to benefit from industry deregulation.
The proliferation of sector and industry indexes and ETFs that track them has led to vehicles that target narrow areas of the equity market such as the insurance industry. Within financial services alone, insurance is one of several industries or sub-sectors that investors can track including regional banks, broker-dealers and exchanges, private equity as well as mortgage finance.
The three insurance industry ETFs now available, while less diversified than owning an ETF that invests across multiple sectors or a sub-asset class like large capitalization stocks, can be a convenient and cost-effective alternative to owning individual insurance stocks. Two of the ETFs own a broad range of specialty insurers and service companies, while the third specifically tracks property and casualty insurers.
The Role of Insurance Industry ETFs as Investments
Insurance stocks are considered defensive investments due to the relative stability of their business models. Insurance companies transfer the risk of adverse events, such as a fire, the total loss of a car or a work-related injury, from one party to a larger population. They collect premiums to cover these losses and are required by law to hold certain levels of cash reserves. 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. Instead, the companies earn income from investing customer premiums. Many insurers pay out a portion of this income in the form of dividends.