IAK: How This Fund Could Act As 'Insurance' In A Market Downturn

seekingalpha04-24

IAK is a buy due to its long-term track record of performance and relatively low correlation to the market overall, as measured by beta value. The insurance industry, particularly in the Asia ...

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Several of IAK's top holdings are uniquely positioned to take advantage of this growth.While insurance companies maintain thin profit margins, they are also highly regulated with capital requirements.","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00BJJMRY28.SGD":"Janus Henderson Balanced A Inc SGD","SH":"标普500反向ETF","SDS":"两倍做空标普500ETF","IE00BMPRXR70.SGD":"Neuberger Berman 5G Connectivity A Acc SGD-H","PGR":"美国前进保险公司","IE00BSNM7G36.USD":"NEUBERGER BERMAN SYSTEMATIC GLOBAL SUSTAINABLE VALUE \"A\" (USD) ACC",".SPX":"S&P 500 Index","SG9999004303.SGD":"Nikko AM Shenton Global Opportunities SGD","OEX":"标普100","SPXU":"三倍做空标普500ETF","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","FDN":"First Trust Dow Jones Internet I","LU2355687059.USD":"NORDEA 1 GLOBAL IMPACT  \"BP\" (USD) ACC","LU0061474705.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN \"AU\" (USD) ACC","KIE":"保险指数ETF-SPDR KBW","UPRO":"三倍做多标普500ETF","MET":"大都会人寿","KBWP":"Invesco KBW Property & Casualty Insurance ETF","SPY":"标普500ETF","LU0158827948.USD":"ALLIANZ GLOBAL SUSTAINABILITY \"A\" (USD) INC","OEF":"标普100指数ETF-iShares","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","IE0002270589.USD":"LEGG MASON CLEARBRIDGE VALUE \"A\" (USD) INC","LU0289960550.SGD":"AB FCP I - GLOBAL EQUITY BLEND PORTFOLIO 'A' (SGD) ACC","ALL":"好事达","LU0985320562.USD":"NORDEA 1 GLOBAL STARS EQUITY \"BP\" (USD) ACC","ACGL":"艾奇资本","LU1291159041.SGD":"CPR Invest - Global Silver Age A2 Acc SGD-H","MSFT":"微软","IE00BFSS8Q28.SGD":"Janus Henderson Balanced A Inc SGD-H","IVV":"标普500指数ETF","ALL.AU":"ARISTOCRAT LEISURE LTD","IE0009356076.USD":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) ACC","IE00B7KXQ091.USD":"Janus Henderson Balanced A Inc USD","BK4504":"桥水持仓","IE00BLSP4239.USD":"Legg Mason ClearBridge - Tactical Dividend Income A Mdis USD Plus","CB":"安达保险","AIG":"美国国际集团","IE00BLSP4452.SGD":"Legg Mason ClearBridge - Tactical Dividend Income A Mdis SGD-H Plus","IE00BFSS7M15.SGD":"Janus Henderson Balanced A Acc SGD-H","LU0109391861.USD":"富兰克林美国机遇基金A Acc","LU0170899867.USD":"EASTSPRING INVESTMENTS WORLD VALUE EQUITY  \"A\" (USD) ACC","IE00B19Z9505.USD":"美盛-美国大盘成长股A Acc","SSO":"两倍做多标普500ETF","LU0072462426.USD":"贝莱德全球配置 A2","BK4107":"财产与意外伤害保险","IAK":"iShares Dow Jones U.S. Insurance","VOO":"Vanguard标普500ETF","LU1983260115.SGD":"Janus Henderson Horizon Global Sustainable Equity A2 SGD-H"},"translate_title":"IAK：该基金如何在市场低迷时充当“保险”","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ACGL":1,"PGR":1,"MSFT":1,"MET":1,"KIE":1,"KBWP":1,"IAK":1,"CB":1,"AIG":1,"ALL":1,"ALL.AU":1,"VOO":0.84,"SPY":0.84,"FDN":0.67,".SPX":0.6,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6},"content_text":"IAK is a buy due to its long-term track record of performance and relatively low correlation to the market overall, as measured by beta value.\n        The insurance industry, particularly in the Asia Pacific region, is expecting solid growth. Several of IAK's top holdings are uniquely positioned to take advantage of this growth.\n        While insurance companies maintain thin profit margins, they are also highly regulated with capital requirements.\n           akinbostanci Investment Thesis iShares U.S. Insurance ETF (NYSEARCA:NYSEARCA:IAK) is a buy due to its long-term track record of performance and low correlation to the market overall. Additionally, the insurance industry, particularly in the Asia Pacific region, is expecting solid growth. While many insurance companies demonstrate minimal profit margins, IAK has several top holdings that are uniquely postured to take advantage of this global industry growth. Although insurance companies are susceptible to losses due to natural disasters, the top insurance companies are diversified in automobile, property, life, and other forms of insurance products. Therefore, IAK and similar insurance ETFs, have demonstrated favorable performance even in years when the market experienced a decline. Fund Overview and Compared ETFs IAK is an ETF that seeks to tracks the Dow Jones U.S. Select Insurance Index. With its inception in 2006, the fund has 55 holdings and $603.80M in AUM. IAK includes predominantly property and casualty insurance (70.01% weight) and life and health insurance (22.11% weight). While the fund captures U.S. holdings that are insurance providers, many of the top holdings have international business in Europe, Asia, and Africa. For comparison purposes, other insurance-focused funds examined are the SPDR S&P Insurance ETF (KIE) and the Invesco KBW Property & Casualty Insurance ETF (KBWP). KIE differs from IAK in that it utilizes a modified equal weight strategy with greater inclusion of mid and small cap holdings. KBWP, similar to IAK, is a cap weighted fund that includes predominantly U.S. holdings. KBWP is heavy on property and casualty insurance, but also includes multi-line insurance providers that bundle various types of insurance for customers. Performance, Expense Ratios, and Dividend Yields Compared IAK has seen a 10-year average annual return of 11.95%. The fund has outperformed KIE over the past 10 years, which has seen an average 10-year return of 11.66%. KBWP has seen the best performance with an average 10-year return of 13.55%. All funds have seen comparable performance to “the market” overall as measured by the average annual return of the S&P 500 Index over the past 10 years at approximately 12.9%.   10-Year Total Price Return: IAK and Compared Insurance Funds (Seeking Alpha)IAK has an expense ratio slightly higher than leading peers at 0.40%. Additionally, it has the lowest dividend yield of comparable insurance funds at 1.39%. IAK’s dividend yield has been growing with a 4.93% 5-year dividend yield compound annual growth rate, or CAGR. Expense Ratio, AUM, and Dividend Yield Comparison    IAK KIE KBWP   Expense Ratio 0.40% 0.35% 0.35%   AUM $603.80M $714.42M $312.81M   Dividend Yield TTM 1.39% 1.47% 1.51%   Dividend Growth 5 YR CAGR 4.83% 6.05% 2.59%   Click to enlarge Source: Seeking Alpha, 22 Apr 24 IAK Holdings and Key Factors Impacting the Fund’s Outlook IAK is the most diversified fund of ETFs compared with 55 holdings. The fund is heavy on its top 10 holdings at 68.3% weight. Each fund has similar top holdings such as The Progressive Corporation (PGR), The Allstate Corporation (ALL), and Arch Capital Group Ltd. (ACGL). However, because they have different tracked indexes and objectives, each fund includes several unique top holdings. Top 10 Holdings for IAK and Peer Insurance ETFs   IAK – 55 holdings KIE – 49 holdings KBWP – 25 holdings   PGR – 15.58% OSCR – 2.48% PGR – 8.88%   CB – 12.57% ALL – 2.38% ALL – 8.50%   AIG – 6.46% PGR – 2.33% AIG – 7.98%   TRV – 6.06% ACGL – 2.30% CB – 7.80%   MET – 5.29% UNM – 2.22% TRV – 7.60%   ALL – 4.95% LNC – 2.22% ACGL – 4.16%   AFL – 4.55% ORI – 2.22% CINF – 4.12%   PRU – 4.52% AXS – 2.22% HIG – 4.05%   ACGL – 4.50% RGA – 2.21% EG – 3.93%   HIG – 3.87% CINF – 2.21% AFG – 3.93%   Click to enlarge Source: Multiple, compiled by author on 22 Apr 24 Looking forward, there are multiple variables impacting the insurance industry and therefore IAK’s holdings. Positive factors include the expected growth of the insurance industry and the low correlation to the market overall. However, a key negative factor is the thin profit margin for most insurance companies. Each of these factors are discussed in greater detail below. Positive Factor #1: Growth of Insurance Market Overall, global growth for the insurance industry could be characterized as slow but steady. As populations in developed markets seek insurance protection, there is a correlation between new insurance policies and population growth in these regions. While a 3.6% CAGR in the insurance industry is expected in North America, the emerging Asia Pacific region is expecting a 7.1% CAGR.   Global Insurance Industry Growth Through 2025 (Accenture, 22 Apr 24)One of IAK’s top holdings, Chubb Limited (CB), is well postured to take advantage of Asia Pacific growth. This is because 37% of its workforce is in Asia and the company has been able to steadily increase its business in the region. In fact, Chubb’s net premiums by geographic percentage have gone steadily up from 25% in 2021, to 27% in 2022, to 29% in 2023 for the Asia Pacific region specifically. American International Group, Inc. (AIG) and MetLife, Inc. (MET) are other top holdings for IAK that also include significant presence in Asia Pacific. For example, MetLife’s total revenues from premiums in 2023 for Asia exceeded Latin America, Europe, Middle East, and Africa. Therefore, the expected growth of the insurance industry, particular in Asia, is the first major positive factor impacting the outlook for IAK and peer insurance funds. Positive Factor #2: Stable Returns with Low Correlation to the Overall Market The second positive factor impacting IAK is its stable returns with relatively low correlation to the market. In 2021, when the S&P 500 Index saw steep declines with a -18% return, IAK had one of its best performing years with a 26.7% return. However, this does not imply constant outperformance. While the S&P 500 Index in 2023 saw a return of 26.29%, IAK saw only a 11.22% increase in price. As indicated by these returns, IAK has a relatively low correlation to the market. To measure this correlation, we can examine each fund’s beta value. A beta value of 0.0 indicates zero correlation while a beta value of 1.0 indicates perfect correlation. IAK boasts a very low 3-year beta of 0.58. This is lower than both compared funds, KIE and KBWP, with beta values of 0.70 and 0.62, respectively. Interestingly, this does not necessarily mean that IAK is not volatile. To measure volatility, we can look at standard deviation. For reference, the S&P 500 has a standard deviation of around 18%. IAK has a standard deviation similar to the market overall at 17.45%. IAK also has the lowest standard deviation of compared funds, indicating that it saw the least volatility over the past few years. For investors, this means that IAK is an attractive fund for those seeking low correlation to the market overall. While IAK may not be a haven from volatility, its low correlation could soften the blow of a market correction to an overall portfolio. Negative Factor #1: Thin Profit Margins Despite the two positive factors for IAK discussed, a key negative factor is the minimal profit margin for top insurance holdings. PGR for example, IAK’s top holding, has a net income margin of 8.90%. Another top holding, AIG, also has a relatively low net income margin at 7.80%. These margins are significantly different from mega cap, big tech such as Microsoft Corp. (MSFT) with a net income margin of 36.27%. These thin profit margins can be explained by two major costs: policy benefits and policy acquisition and underwriting. First, due to inflation and other variables, the costs for insurance companies to pay out claim benefits has risen significantly. While car insurance premiums increased 15.5% in 2023, the costs to repair vehicles went up 20.2%. Second, the costs for policy acquisition and underwriting have also gone up. While PGR had a total revenue of $62.1B in 2023, its paid-out policy benefits were $45.7B. Policy acquisition and underwriting costs added another $10.9B. Current Valuation  IAK has demonstrated strong recent performance including a 30.1% one-year return. This performance has outpaced all competitor insurance funds and the S&P 500 over the past one-year period. Such a return can largely be credited due to PGR's gains with a one-year performance of 57.3%. IAK’s current price is roughly 3% below its all-time high price seen last month.   One-Year Performance: IAK and Compared Insurance ETFs (Seeking Alpha)With its strong recent performance, IAK has a price-to-earnings and price-to-book ratio slightly higher than peer competitor funds. While PGR has contributed to much of IAK’s solid recent gains, the holding also has contributed to a higher valuation. Progressive’s individual P/E ratio stands at almost double its sector median. Chubb, IAK’s number two holding, is also slightly higher than its sector. Despite this comparatively high valuation, I believe IAK has strong growth potential stemming from the favorable industry factors already discussed. Valuation Metrics for IAK and Peer Insurance Funds    IAK KIE KBWP   P/E ratio 14.80 10.27 14.57   P/B ratio 1.59 1.58 1.77   Click to enlarge Source: Compiled by Author from Multiple Sources, 22 Apr 24 Risks to Investors While the number of policies an insurance company writes and premiums it collects positively impacts revenue, the number of claims received negatively impacts revenue. Environmental disasters including tornadoes, hurricanes, and wildfires directly contribute to these costs. Unfortunately, these instances have been increasing over the past decade. Over a 39-year period between 1979 and 2017, for example, the number of major hurricanes has notably increased. Other forms of natural disasters have also led to a high number of insurance claims.   Increase in Global Natural Disasters, 1980-2019 (Statista, MunichRe)Due to the thin margins discussed, a high number of disasters could lead to an insurance company declaring bankruptcy. However, there are two potential stopgaps for large-scale insurance corporation insolvency. The first is the regulatory framework in each state for insurance companies. According to these regulations, an insurance company must be licensed, meet capital requirements, and adhere to insurance sales requirements. The second backstop is government intervention. This was seen with AIG, for example, with the Emergency Economic Stabilation Act of 2008. Concluding Summary  IAK and peer insurance ETFs have seen consistent returns that have slightly underperformed the market overall. However, the key benefit to IAK is its low correlation to the market. This may benefit investors seeking funds that do not move in line with overall market corrections. While the global insurance industry is expecting steady growth, insurance companies typically have thin profit margins. These small margins can prove troublesome in the event of frequent large-scale disasters. However, large insurance companies are regulated, ensuring that they meet sufficient capital requirements.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429824494"}