From an equity asset allocation perspective, life insurers were heavier users of large-cap ETFs, while P&C companies had relatively higher exposure to mid- and small-cap ETFs according to S&P Dow Jones Indices. While Ramachandran did not highlight specific tickers, CFRA believes SPDR S&P 500 Index (SPY), Vanguard 500 Index (VOO) and iShares Russell 1000 (IWB) are among the popular large-cap ETFs used by institutional investors, while iShares Core S&P Mid-Cap ETF (IJH) and iShares Russell 2000 (IWM) are widely held mid- and small-cap ETFs.

Meanwhile, in 2016, fixed income ETF assets owned by insurers climbed 82% in 2016, relative to the 8% growth for equity ETFs. Fixed income ETFs comprised 39% of life insurance company ETF assets at the end of 2016, higher than the 13% for P&C companies.

“The liquidity of the ETF gives life insurers efficient access to beta and, importantly, yield,” according to Josh Penzner, head of iShares Fixed Income & Insurance distribution at BlackRock. “This enables portfolio managers to focus on research and sourcing of individual bonds while still meeting duration and spread targets.”

For example, insurance companies gain exposure to intermediate-term investment-grade corporate bonds using iShares iBoxx $ Investment Grade Corporate Bond (LQD) in a diversified and low cost manner. Managers seeking to shorten duration of their portfolio could consider Vanguard Short-Term Bond Index (BSV 80 Overweight), as the ETF’s average duration of 2.8 years is lower than the 8.2 years for LQD.

While LQD, BSV and other ETFs cited above regularly trade with a penny bid/ask spread, CFRA thinks greater adoption by a range of investors helped ensure that all that want to gain access to these ETFs can do so with limited costs. Typically, as volume increases and assets swell, bid/ask spreads and expense ratios tighten.

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

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