IAK - IAK: Insurance Keeps On Benefiting

2023-11-17 06:29:55 ET

Summary

• The iShares U.S. Insurance ETF is a concentrated portfolio with top holdings in major insurance companies like Progressive, Chubb, AIG, Aflac, and MetLife.
• IAK primarily invests in the Property & Casualty Insurance sector, making up 67.12% of its holdings.
• Investing in the insurance sector provides exposure to a stable industry, the potential for high returns, and inflation hedging, but comes with risks of defaults, regulatory changes, and exposure to catastrophic events.

I don't know about you, but I certainly don't see disinflation in insurance costs. And as frustrating as that is, that's why the iShares U.S. Insurance ETF (IAK) may be worth an allocation in your portfolio. Downward sticky? Insurance sure seems sticky and profitable in an environment like this.

IAK is an exchange-traded fund that aims to emulate the performance results of the Dow Jones U.S. Select Insurance Index. This index includes U.S. equities from the insurance sector. The ETF was launched on May 1, 2006, by BlackRock Fund Advisors and is traded on the NYSE Arca exchange. As of November 14, 2023, the ETF had net assets of $381,228,945.

Details on ETF Holdings

IAK is a concentrated portfolio, with a significant portion of its holdings in the top 10 companies, accounting for 66% of the total portfolio. Thus, the performance of these top holdings heavily impacts the ETF's overall performance. Top positions include:

1. The Progressive Corporation (PGR) : This is one of the largest providers of car insurance in the United States. Progressive Corp. accounts for 13.37% of the IAK's portfolio.

2. Chubb Ltd. (CB) : A multinational insurance company, Chubb Ltd. is one of the world's largest publicly traded property and casualty insurance companies. It makes up 12.92% of the IAK's portfolio.

3. American International Group (AIG) : Known as AIG, this American multinational insurance corporation is a major player in the global insurance industry. It comprises 6.55% of the IAK's holdings.

4. Aflac Inc. (AFL) : Aflac Inc. is an American insurance company and the largest provider of supplemental insurance in the United States. It makes up 6.33% of the IAK's portfolio.

5. MetLife, Inc. (MET) : As one of the largest global providers of insurance, annuities, and employee benefits programs, MetLife Inc. occupies 5.65% of the IAK's holdings.

Details on Sector Composition

In terms of sector composition, the IAK ETF is primarily invested in the Property & Casualty Insurance sector, which makes up 67.12% of the total holdings. The Life & Health Insurance sector accounts for 24.72% of the holdings, followed by the Multi-line Insurance sector, which represents 8.01% of the total portfolio.

Peer Comparison

The SPDR S&P Insurance ETF (KIE) and the Invesco KBW Property & Casualty Insurance ETF (KBWP) also offer exposure to the insurance sector but have different portfolio compositions and performance metrics. IAK has outperformed the two nicely over the last two years.

Pros and Cons of Investing in the Insurance Sector

Pros

1. Exposure to a Stable Industry : The insurance industry tends to be less volatile than other sectors due to its essential nature. Regardless of economic conditions, individuals and businesses require insurance, providing a stable revenue stream for insurance companies.

2. Potential for High Returns : Insurance companies invest premiums in various financial instruments to earn a return, which can lead to high profits if the investments perform well. Additionally, insurance companies can benefit from rising interest rates, as they can earn a higher return on their investments.

3. Inflation Hedging : Some insurance companies offer inflation-adjusted premiums, which can act as a hedge against inflation.

Cons

1. Risk of Defaults : During economic downturns or periods of high unemployment, the risk of policyholders defaulting on their premium payments increases, which could impact the profitability of insurance companies.

2. Regulatory Risks : Insurance companies are heavily regulated, and changes in regulations can significantly impact their business operations and profitability.

3. Exposure to Catastrophic Events : Insurance companies are exposed to the risk of catastrophic events, such as natural disasters, which can lead to significant claims and impact their profitability.

Conclusion: To Invest or Not to Invest?

Investing in the iShares U.S. Insurance ETF provides targeted exposure to U.S. insurance companies, and its performance is highly dependent on its top 10 positions that make up a significant portion of the portfolio. While the fund has shown resilience in the face of economic turbulence, the concentration risk is real and worth keeping in mind when deciding how much to invest. Good fund, a good part of the economy, and worth a potential allocation in my view.

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