Insurance ETF: Counterintuitive Hurricane Buy

10/10/2017 5:00 am EST

Focus: ETFS

Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

It's been a very rough year for hurricanes; lives have been lost, there has been billions in property damage, and over 250,000 cars have been ruined, observes Glenn Rogers, contributing editor to Internet Wealth Builder.

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It may be unseemly to profit from the misery of others but life will go on so we may as well have a look at the opportunities these massive storms have stirred up.

It is counterintuitive, I know, but there is profit potential with insurance companies. These stocks always sell off as a major storm approaches but inevitably bounce back shortly after. There are a couple of reasons for this.

First, the insurance industry is capitalized at approximately $500 billion and the insured losses from these storms is likely to be less than 5% of this number.

Second, hurricanes (and other natural disasters) give the insurance companies a great excuse to raise rates, which they inevitably do if history is our guide.


You can buy the individual companies, of course. Travelers (TRV), Allstate (ALL), and Progressive Corp. (PGR) are among the larger ones. All took a dive following Irma but are already bouncing back.

But rather than focusing on one company, I buy the PowerShares KBW Property & Casualty Insurance Portfolio ETF (KBWP). This ETF has all of the stocks mentioned above and a lot more and is highly rated by Morningstar (five stars).

True to form, it sold off as the storms approached but then bounced back faster than I would have guessed. At the time of writing, however, it was still off its 52-week high of $61.03 (figures in U.S. dollars), closing on Friday at $58.

Over the five years to Aug. 31, the fund produced an average annual compound rate of return of 17.8% with a gain of 14.9% in the latest 12 months. This return has been generated with very low volatility and reasonable costs (MER of 0.35%).

Additionally, it has outperformed 96% of its competitors. The fund makes quarterly distributions, with the September payment being $0.20 per unit. The 12-month yield is 1.9%. This is not an exciting ETF but it is solid and safe. Buy with a target of $65.

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