IAK iShares US Insurance

Although it is still hard to say just how long lasting the impact from Hurricane Sandy will be, the storm appears to be living up to at least some of its hype so far. The major weather event looks to knock out power to millions across the broad Mid-Atlantic and Northeast regions of the U.S., potentially costing the area billions in economic activity, not just during the storm, but possibly for a longer period depending on how long the lights take to come back on.

Beyond the damage, power outages, and the potential loss of life, the so-called ‘Frankenstorm’ has also impacted stock markets in a very important way. The storm has now knocked out stock trading for the second day in a row, marking the first time in more than a century that weather has been the cause for a two day trading suspension of the New York markets (read ETFs That Will Haunt Your Portfolio If You Don’t Buy Them).

While traders anxiously await the resumption of trading in a number of key financial products, there are undeniably some sectors of the broader economy that look to be especially impacted once trading starts back up again. In particular, we think the following three ETFs could be directly affected by Hurricane Sandy and possibly in for some volatile trading once markets open back up later this week:

Insurance

With Hurricane Sandy impacting some of the most valuable and densely packed real estate of the United States, insurers could be in for a rough time this quarter. While the stocks in this space have been performing pretty well so far, damage is expected to reach well into the billions and looks to hit a number of insurance companies in the process.

Due to this, a host of insurance ETFs could be in for some down days if the storm turns out to damage a large swath of the eastern seaboard. While KBWP looks to be the most directly impacted ETF by this storm, the iShares Dow Jones US Insurance ETF (IAK) looks to be a more popular ETF play on the situation (also read The Truth About Low Volume ETFs).

This fund has about $70 million in AUM and sees volume of roughly 17,000 shares a day, making it extremely more popular than KBWP. The product also holds about 60 securities in its basket, giving it wide exposure to the firms in the Dow Jones US Select Insurance Index.

Investors should also note that the product has a large cap tilt, although mid caps and small caps account for roughly 40% of the assets too. Yields are also decent on this fund at roughly 1.6% in 30 Day SEC terms, although fees are a little steep considering everything, coming in at 47 basis points a year.

International trading of major insurance firms that dominate many insurance ETFs were down initially following the first reports of the damage, so it could certainly lead to losses. However, it is also worth pointing out that if the storm doesn’t turn out to be too bad insurance ETFs are likely to continue their solid run, suggesting there is some risk built in to this scenario, especially on a company-by-company basis.

Construction

Assuming that the storm does a great deal of damage, firms in the construction sector could benefit from the cleanup afterwards.  "This will show up in increased spending at hardware and home stores," Diane Swonk, chief economist at Mesirow Financial wrote in a recent note. "There should also be an increase in spending, once damages from the storm are assessed and repairs get underway. That spending could borrow a bit from traditional holiday sales, depending on how much insurance is paid on those claims."

Given this trend, construction-based firms could continue their solid run heading into the ending part of the year, adding to their non-storm related gains from earlier in 2012. While there are a number of ETFs to play this scenario, one that stands out is the iShares Dow Jones Home Construction Index Fund (ITB).

Mid caps and small caps dominate this product, while home builders account for roughly two-thirds of exposure in this popular fund. Beyond direct homebuilders, companies in the retail, appliances, and building materials spaces also make up a decent chunk of assets too (read Three Construction ETFs For An Economic Recovery).

These firms could benefit as people restock their homes to replace the damaged items, acting as a pre-holiday catalyst for much of the sector. Additionally, the product has a huge volume and solid AUM so trading in and out of the fund shouldn’t be a problem at all (at least when the markets reopen).

Not only has this ETF been a top performer so far in 2012, but the product has a Zacks ETF Rank of 1 or Strong Buy, suggesting that there could be more strength in this product even without the storm acting as a tailwind.

Gasoline

Much of the storm is centered on Philadelphia and the broader metro region around this important city. While many Americans probably know that Philly was vital to the country’s founding, they might not know that it is today a major center of gasoline production.

Ports that service tankers have been shut across the Northeast while major refineries in the region are also closing down or operating at reduced levels. Given that other pipelines and various other gasoline related businesses are poised to shut down or see reduced output thanks to the storm, we could see a huge short-term reduction in gasoline for this key region of the nation.

While it is true current demand is probably reduced to a lack of economic activity right now, the real test will be when the storm passes. If the damage is severe and there is a struggle to bring back production, gasoline could have some legs as we approach November (read Why the Gasoline ETF Is a Top Performer).

An easy way to play this trend is with the United States Gasoline Fund (UGA). This product tracks RBOB futures and charges investors just 60 basis points in fees.

The ETF also sees decent volume and AUM of, respectively, 45,000 shares a day and $60 million in assets. This suggests modest bid ask spreads for this product, making it relatively easy to trade.

The fund looks to easily be the most impacted by the trends highlighted above and it is also one of the only ones that has a focus on RBOB futures. Due to this, this fund looks to be one of the best ways for short-term traders to play Hurricane Sandy and her short to medium term impact on the East Coast.

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ISHARS-DJ INSUR (IAK): ETF Research Reports
 
ISHARS-DJ HO CO (ITB): ETF Research Reports
 
PWRSH-K P&C INS (KBWP): ETF Research Reports
 
US GAS FUND LP (UGA): ETF Research Reports
 
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