The One No-Brainer Available?

By Travis Johnson, Stock Gumshoe, September 16, 2008

I added some shares to an ETF today, as at least a short term position as I look at other possibilities — I picked up shares in the PowerShares Dynamic Insurance Portfolio (PIC).

This is an intriguing index for one reason:  It is essentially made up of all of the large and high quality insurance companies EXCEPT AIG.  You can look at the holdings here, but the biggest holding is Chubb, which is up 10% today, and the other large holdings are also all large insurance companies that will be licking their chops at the opportunity to pick up some of AIG’s business if AIG does indeed go under or become much smaller.

So — the biggest company in an extremely profitable and largely value-priced sector loses its reputation almost overnight, and you have an opportunity to buy almost every good company in that sector without buying that one really poor performer?  That’s close to a  no brainer, at least conceptually.  It might still not work, and many of these companies are probably interrelated with AIG and with other troubled financial companies in someway, but since it’s a fairly deep index that’s fundamentally weighted (the PowerShares Dynamic ETFs are essentially “actively managed indexes” that try to buy the strongest stocks in a sector), the downside should be relatively minor. The other big insurance ETFs include the iShares offering, which still had 2.5% in AIG as of yesterday (that number has fallen precipitously over the last few months, obviously, since most index ETFs are market-cap weighted and AIG used to be their biggest holding); and the State Street SPDR for Insurance, KBW — that one also was dropping AIG as its market cap fell, but still had about 1.4% in AIG yesterday.

Pretty soon all insurance ETFs may well be out of the business of owning AIG, but I do find some comfort in the “active” part of the PowerShares PIC ETF that kept them from being big AIG owners during this recent downturn in the shares.

I’ll put a stop loss order in on this, probably at 8 or 10%, but I don’t expect to see it hit.  These companies have the potential to see some nice profitability in the wake of this year’s hurricanes and in the wake of the financial hurricane at AIG — insurance is all about trust and confidence, and every other company aside from ...

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