Even With No Fed Help, This Financial ETF Soars

Perhaps more than any other sector, financial services, the second-largest sector weight in the S&P 500, would like to see the Federal Reserve raise interest rates. Better yet, financial services stocks wouldn't mind multiple rate hikes.

Within the financial services sector, some industry groups are more dependent on higher rates than others. Regional banks take the cake on that front, but insurance providers also stand to benefit from hawkish Fed action.

Insurance ETFs deserve some credit for being positively correlated to rising Treasury yields. Simply put, steeper yield curves are advantageous for insurance providers. In other words, the SPDR S&P Insurance ETF KIE deserves some credit for recently making a series of all-time highs. KIE was one of just 12 ETFs to do so on Monday, extending its year-to-date gain to over 8 percent. That is more than double the year-to-date return of the Financial Select Sector SPDR XLF.

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Insurance ETFs' rising rates advantage is tied to the strong dollar. The stronger greenback affects an array of sectors and industry groups, but not insurance companies because U.S.-based insurance providers write the bulk of their policies in the US.

The results of the Fed's CCAR open the door for XLF holdings to increase dividends and buybacks, an important factor when considering many XLF's holdings, although sources of dividend growth in recent years, still sport payouts below those seen prior to the financial crisis. Insurance providers, including some residing in KIE have been generous in terms of increasing dividends and buybacks in recent years.

KIE is an equal-weight ETF, a strategy that's proving rewarding for investors this year as the fund has outperformed the cap-weighted iShares U.S. Insurance ETF IAK by a margin of better than 2-to-1.

XLF, the largest financial services ETF by assets, allocates 16.4 percent of its weight to insurance providers, making that group the ETF's third-largest industry weight behind banks and real estate.

The $570.6 million KIE allocates 38.8 percent of its weight to property and casualty insurers and another 24.7 percent of its lineup to life and health insurance providers. Reinsurance, insurance brokers and multi-line firms combine for over a third of the ETF's weight.

Disclosure: The author owns shares of XLF.