Key Takeaways

Fundamental Context

In the first quarter of 2021, more than half of dollar volume in ETF trading by insurance companies was in fixed income ETFs. This is impressive as the asset class represented 35% of year-end 2020 assets. Insurers traded $15 billion worth of ETFs in the first three months of 2021, with $8 billion in fixed income products, $7 billion in equity offerings, and a negligible amount in other assets, according to S&P Dow Jones Indices. While net purchases of equity ETFs were made in January and February, insurers were net sellers of the asset category in March. In contrast, fixed income ETF buying was persistent throughout the quarter, with an acceleration in the final month of the quarter.

“Insurance companies continue to increase their use of fixed income ETFs,” said Raghu Ramachandran, Head of Insurance Asset Channel at S&P Dow Jones Indices. “Large insurance companies are using ETFs to access bond liquidity, while life companies are substantial traders of fixed income ETFs. This continued adoption by insurance companies across the board has led to a substantial increase in trading volume resulting in increased liquidity for all ETF users.” https://www.spglobal.com/spdji/en/commentary/article/etf-transactions-by-us-insurers/

CFRA recently covered the 2020 trends in a thematic research article titled “Fixed Income ETF Demand by Insurers is Accelerating” in late May. While the dollar value of ETF trades made by insurance companies remains small, the institutional investor segment had $7.2 trillion of investable assets at the end of 2020, less than 1% of which was invested in ETFs. Growing comfort with ETFs will drive this sharply higher in the coming years.

Eight of the top 10 ETF net purchases were fixed income products. While investors collectively redeemed $10 billion of LQD in the first quarter of 2021, according to CFRA data, insurance companies added $1.1 billion of the investment-grade corporate bond ETF to their net coffers — the most for any product according to S&P Global Market Intelligence data. Prudential Financial, TIAA, and Voya Financial were some of the life insurers that were net buyers of LQD. Insurers similarly were net buyers of HYG and iShares 0-5 Year High Yield Corporate Bond ETF (SHYG ****), with purchases of $347 million and $125 million, respectively, even as these high yield bond products incurred net outflows from other investors.

In addition to their buying of SHYG, insurers were large purchasers of less interest-rate sensitive investment-grade products, including index-based iShares Short-Term Corporate Bond ETF (IGSB) and SPDR Portfolio Short-Term Corporate Bond ETF (SPSB) along with actively managed JPMorgan Ultra-Short Income ETF (JPST) and PIMCO Enhanced Short Maturity ETF (MINT). CFRA’s ETF star ratings are currently rewarding fixed income funds that are incurring risk to generate higher yields.

The ten ETFs with the highest net purchases by insurance companies in the first three months of 2021 benefitted from $3.1 billion of trading, even though as a group they had $11 billion of industrywide net outflows. Insurance companies provided much-needed liquidity for some out-of-favor products.

Insurance companies were net sellers of four of the larger developed and emerging market international products in the first quarter of 2021. iShares Core MSCI Emerging Markets ETF (IEMG) had the highest overall net sales with $312 million, but iShares Core MSCI EAFE ETF (IEFA), iShares MSCI EAFE ETF (EFA **), and Vanguard FTSE Developed Markets ETF (VEA) incurred just over $440 million of combined net sales in the first three months of the year.

 

In contrast, IEMG’s older and more expensive emerging market sibling, EEM, stood out among international equity ETF peers, with approximately $300 million of net purchases by insurers. EEM was purchased by a few property and casualty insurers, including Erie Insurance and Liberty Mutual.

Conclusion

As institutional investors gain comfort with a wider array of ETFs, the liquidity of these funds should improve for all shareholders and result in lower trading costs. Insurance companies still hold a small percentage of ETF assets, but growing usage is a strong signal of the potential of ETFs, we believe, and why we expect all asset managers will be focusing more on this segment of the market. During the first quarter of 2021, insurance companies were buyers of ETFs that were sold by other segments of the market.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.