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.    

  1. Commercial Lines Insurance

    Commercial lines insurance helps keep the economy running smoothly ...
  2. Cover Note

    A cover note is a temporary document issued by an insurance company ...
  3. Assigned Risk

    Assigned Risk is when an insurance company is required to provide ...
  4. Business Insurance

    Business insurance coverage protects businesses from losses due ...
  5. Life Insurance

    Life insurance is a contract in which the insurer guarantees ...
  6. Weekly Premium Insurance

    Weekly Premium Insurance is a type of financial protection where ...
Related Articles
  1. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  2. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  3. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  4. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  5. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  6. Insurance

    Add-On Insurance: Do You Need It?

    Insurance is important in certain situations, but there isn't always a need.
  7. Insurance

    The Dangers Of Stranger-Owned Life Insurance

    Find out how these policies can be used to abuse the system that many people rely on for protection.
  1. What is the main business model for insurance companies?

    Read about the most important components of an insurance company business model, such as risk pricing, investing and claims ... Read Answer >>
  2. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center