2023-11-03 00:14:05 ET
Summary
- KBWP is one of the niche ETFs on my short list of candidates to own as the equity market gradually shows potential to recover from nearly 2 years of declines.
- Property & Casualty Insurance is a relatively stable sub-segment of the financial sector with solid profitability and potential as a safe haven in a rocky market.
- KBWP has shown resilience and avoided major drops over the past three years, and its focused set of stocks are high quality businesses.
I've been around for nearly 60 years. I remember the 1973 Middle East War, the 1987 Crash, the Iraq-Kuwait-US conflict, and the turmoil of recessions. I recall vividly the busting of the Dot-Com Bubble in 2000, the Global Financial Crisis in 2008, 9/11 and all of the other manic events of the past several decades. I've endured hurricanes and one earthquake. And I was actually in the World Trade Center in 1993, when the building was bombed in the basement but they missed. 97 floors of walking later, we were safe.
What's the point? I have been reminded over and over about the concept of insurance, particularly when it comes to the risk to property and assets. The insurance concept is a central part of my "avoid big loss" mentality in managing portfolios. And so naturally, it doesn't take much to attract me to the investment potential of the largest stocks in the property and casualty insurance industry.
Invesco KBW Property & Casualty Insurance ETF ( KBWP ) owns companies in this industry, whose products are increasingly a necessity in an era of climate change and geopolitical conflict, as well as weakened infrastructure. That has led to higher premium rates and stingier coverage, following a period of increased claims caused by adverse events. As opposed to other types of financial companies that have risks from depositors, capital markets activity or consumer credit, P&C insurance is a relatively stable sub-segment of the financial sector.
I believe this is the most dangerous market climate of our lifetime. So with that in mind, let's take a closer look at why this P&C Insurance industry ETF is one I am considering as I gather a short list of equity market segments that I can have ready to go once I believe that reward finally outweighs risk, something I have not felt since 2021.
KBWP: an ETF full of solid features
KBWP tracks the KBW Nasdaq Property & Casualty Index, which currently holds 26 stocks. The top 10 account for 62% of the ETF's assets, so I know what I own. In fact, one of the things I like best about focused, niche ETFs like this one is how I can use Seeking Alpha's quant grades to see what's driving the over performance. As is the case with many industry-specific ETFs, the top weighted holdings carry the load.
The 6 stocks above comprise 45% of KBWP and the quant grades paint a picture of an industry that is solidly profitable, has a history of earnings and revenue growth, and relative to the broader stock market, has some price momentum. The sticking point, as is the case with nearly every market segment I track (about 150 equity ETFs) is valuation. Yet as opposed to other industries, this one has the potential to be viewed as a safe haven in a rocky market.
KBWP holds $164 million in assets, and it has been listed since 2010. Invesco, the issuer, is one of the top tier firms in the ETF business.
Property & Casualty Insurance is currently in a ‘sweet spot’ for the possibility of rising returns. This is due to the past few years being a “hard market for insurance with price increases, reductions in terms and conditions (that is, less coverage per dollar of premium written), and capital leaving the industry.” -Royceinvest.com. After the bank failures and uncertainties in March caused a drop across the financial sector, P&C Insurance, which also suffered with the rest of the financial sector, has been slowly and steadily recovering.
This chart tells a unique story
You don't see a chart like the one above very often. It shows the resilience of the stocks in this industry over the past 3 years, a most challenging period for equity investors. I charted it against the ETF that investors tend to think of when they hear "financial stocks." But as I noted earlier, P&C insurance companies are in a different type of business altogether. I think that accounts for the smoother ride the past few years.
In fact, I can't think of too many equity ETFs I track that have avoided major drops as well as this one has. And my current chart analysis hints at breakout potential. It's not quite there yet, but like I said, KBWP is on my short list for "fresh money buys" going forward.
For further details see:
KBWP: This P&C Insurance ETF Is On The Verge Of Breaking Through