Thursday’s Producer Price Index report all but guaranteed that the Fed will cut interest rates by 0.25% this upcoming Wednesday.
There are a number of investments that are set to benefit more than others in the market as a result, I’ll cover a number of them over the next five days, but Today’s is a simple idea that is flying below the radar of most investors.
Let’s uncover this low volatility Fed Friendly investment that’s already one of the best performing sectors of 2024.
No, it’s not the Nasdaq 100, something much more boring.
I’ve talked about the positive effect that lower interest rates will have on the banks and homebuilders as we prepare for the Fed’s first interest rate cut since raising rates in response to inflation. But there’s another investment that the “Smart Money” has been investing in for the last three months ahead of next week’s interest rate meeting.
Since the beginning of 2024, the SPDR S&P Insurance ETF (KIE) has posted returns of 21%.
That’s 50% better than the Nasdaq 100 with all of its Magnificent Seven stocks. The returns are 21% higher than the Semiconductor ETF (XSD) that is currently posting 0.0% returns for the year.
Why would insurance companies be outperforming and will this trend continue?
YES!
Companies like Progressive Insurance, Cincinnati Financial and Chubb – the company that Warren Buffet is now investing in –spent 2021 and 2022 fighting the Fed’s trend in interest rates.
Higher rates can work against these companies as they negatively affect their portfolio of bonds. Those portfolios are what help to fund the companies’ operations and revenue.
But that trend is now changing.
The lower interest rate environment is going to turn the headwind that insurance companies have been facing into a tailwind as lower rates will help to inflate the value of the insurance companies’ portfolios.
As a result, investors should be preparing for an increase in revenue and profits for the insurance companies that hasn’t happened wince 2012.
After the Housing Crisis of 2009, insurance companies were put in the same situation. The Fed lowered rates to help spark economic growth, a move that helps to bolster any company managing a portfolio of bonds.
As the economy firmed and started to grow, the insurance companies flourished.
We saw the value of the SPDR S&P Insurance ETF ETF more than double over a three year perios, almost outperforming the tech heavy Nasdaq 100 Index.
Here’s the thing though.
The insurance ETF posted that performance while experiencing less than half of the volatility of the Nasdaq 100.
Put simply, the insurance ETF is a “boring” investment that outperforms one of the most volatile group of stocks.
I’ll take that action anytime I can get it.
Why do you think that Warren Buffet is accumulating Chubb Insurance? Sure, Buffet already liked insurance companies by way of his holdings in Geico, but adding another to the mix ahead of the Fed’s interest rate cuts was a savvy move.
As I mentioned, the SPDR S&P Insurance ETF is already the market leader for 2024. That’s because “smart money” like Warren Buffet and institutional traders have been slowly acquiring the insurance companies.
The SPDR S&P Insurance ETF is currently trading at $55, all-time highs for the ETF.
We’ll start to see “the crowd” move into this trade over the next 3-6 months as the Fed settles into their pace for lowering rates.
That’s where the sweet spot of this trade lies.
The long- and intermediate-term bullish trends will fuel growth of 25-30% over that 6 month period, likely maintaining the insurance ETFs top performance spot.
Purchasing the SPDR S&P Insurance ETF is the easiest way to trade this surge in activity. The ETF offers the benefits of diversification among the insurance industry leaders, helping to maintain a lower volatility rally.
More aggressive traders may wish to use options to leverage the move higher.
The March 21, 2025 KIE $60 calls are currently prices at $700 per contract. A move to the 25% target would realize gains of more than 50%.
As always, use stop-loss and profit-taking rules of engagement to manage an options position like this effectively.
We’ll update you on the development of this low-volatility high-return trade over the next few months.
