IAK: Insurance Stocks' Momentum Waning, Valuations Still Strong

Insurance stocks boasted some of the best relative strength in 2022 of all industries. The group within the Financials sector was flocked to for strong yields and balance sheets that generally benefited from a rise in interest rates.

Recently, though, relative strength has waned with the group as it fails to keep up its relative momentum in 2023. I still have a buy call on the IAK, but I will be monitoring some price levels on the chart.

IAK Relative Strength Soft Since Q4

According to the issuer, the iShares U.S. Insurance ETF (NYSEARCA:IAK) offers investors exposure to U.S. companies that provide life, property and casualty, and full-line insurance. The fund is U.S.-focused and is solely invested in the Financials sector.

IAK has a somewhat low expense ratio of 0.39% and is up fractionally on the year, underperforming the S&P 500. With more than $570 million in assets under management, it is a medium-sized ETF with average daily volume low near 40,000 shares. Still, the median 30-day bid/ask spread is not too high at 10 basis points and the fund yields 1.6% per iShares. With 56 total positions, the forward price-to-earnings ratio is listed as 13.1 as of March 3.

IAK falls right on the border between a large-cap fund and a mid-cap, but solidly in the value section of the Morningstar Style Box. The 5-year factor profile shows it's very much a value fund and that was seen in price action last year with its outperformance in value’s best year vs growth since 2000. The yield is relatively high, and momentum has been strong, but I see it as waning. With solid long-term growth in earnings, the valuation remains strong in my view.

IAK: Portfolio & Factor Profiles

IAK has a concentrated portfolio with Chubb and Progressive making up nearly a full quarter of the ETF. Monitoring fundamental and technical trends in those names is key. More broadly, the fund is primarily invested in P&C names.

IAK Industry Exposure

Seasonally, IAK tends to perform well starting this time of year through early May before some summer struggles, according to data from Equity Clock.

IAK: Seasonal Tailwinds In March

The Technical Take

While I still like the valuation on IAK, the chart is starting to show exhaustion signs. Notice in the graph below that shares have not rallied above the April 2022 high with any kind of vigor. Technicians want to see breakouts happen with strong momentum and volume, then perhaps a successful retest. In this case, IAK inched above the 2022 peak but has since wavered back below the Q2 2022 $94 high. This meandering price action has occurred alongside declining RSI momentum. That is yet another indecision signal. Volume, meanwhile, has been unimpressive since a few spikes last November.

From an intermarket perspective, the recent jump in yields, you would presume, would auger more relative gains for insurance at the expense of long-duration tech stocks. That has not exactly been the case. So, IAK should be rallying big relative to other industries, but it isn’t.

I see support at an uptrend line currently near $92 and at a horizontal level in the $88 to $90 range while the long-term 200-day moving average remains positively sloped and under-price (which is bullish). A move above $95 with better RSI momentum would support the thesis that the bull market here will continue.

IAK: Unimpressive Move to New Highs

The Bottom Line

I continue to like IAK, but technical issues have popped up. I am keeping my buy for now, but I’ll be monitoring relative price strength trends over the coming months.