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.


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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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