Fixed Income ETFs Gain Traction With Insurers

Fixed income ETFs are becoming more appealing to insurance companies, thanks to the efforts of ETF issuers and regulatory changes.

A survey conducted by Cerulli Associates revealed that 63% of ETF issuers expect overall ETF use within insurance general accounts to increase over the next 12 months, while only 33% said the same for defined contribution plans. Meanwhile, analysis from S&P Dow Jones Indices shows that fixed income ETFs accounted for about $13 billion of the $36.9 billion in total ETF assets held by U.S. insurance general accounts as of December 31, 2020, up more than 170% from December 31, 2016.

Adam Schenck, a principal and managing director at Milliman Financial Risk Management, told Pensions & Investments that over the past five to seven years, issuers have assumed a “significant educational effort” over bond ETFs within the insurance industry.

“There have been concerns that have had to be allayed related to volumes in volatile periods, liquidity and spreads, but those myths have been debunked by action through ETFs’ track records as much as any words,” Schenck added.

Peter Wirtala, an insurance strategist at Asset Allocation & Management, told P&I that ETF issuers have “done a lot to turn [bond ETFs] into convenient tools for insurers through working with regulators, through new product designs.”

In addition to the educational efforts of ETF issuers, the accounting guidance issued by the National Association of Insurance Commissioners and a rule change from the NY Department of Financial Services also contributed to insurers finding fixed income ETFs more enticing. NAIC adopted “systematic value” in 2017 as an option for accounting for NAIC-designated fixed income ETFs. According to a 2021 paper from State Street Global Advisors, systematic value is a modified amortized cost accounting method which will allow fixed income ETFs to more closely mirror the effective interest method applied to individual bonds, which is a major step towards the increased adoption of fixed income ETFs.

Through a new rule from the DFS that went into effect on December 15, an ETF can receive bond-like capital treatment if it invests only in fixed income securities and cash, is passively managed, has at least $1 billion in assets under management, and is rated by a nationally recognized statistical rating organization. This new rule makes it easier for insurance companies to hold fixed income ETFs in their portfolios.

BondBloxx Investment Management recently launched seven U.S. high-yield bond ETFs that offer precise, index-based exposure to the high-yield asset class and allow investors the opportunity to diversify and manage risk to the industry sector.

The passively managed funds track rules-based sub-indexes of the ICE BofA US Cash Pay High Yield Constrained Index. The funds each have an annual expense ratio of 0.35%.

For more news, information, and strategy, visit the Institutional Income Strategies Channel.