Insurance companies are allocating more money from their portfolios to exchange-traded funds — particularly into fixed income ETFs, according to research from S&P Dow Jones Indices.
The research shows that in 2021, U.S. insurance companies added $1.5 billion in ETF assets last year, bringing the total invested in these products to more than $45.4 billion. This is a 15% increase from 2020. Historically, insurance companies have primarily invested in equity ETFs. In 2021, there was a significant rotation out of equity ETFs and into fixed income.
Raghu Ramachandran, head of S&PDJI’s insurance asset channel and author of the report, recently told VettaFi that the liquidity of ETFs are one of the main reasons why they’re so attractive to insurers. “From what we’ve heard clients saying, they were selling equities to reduce the capital charge in the balance sheet. It’s the liquid alternative, and ETFs are very liquid,”Ramachandran said, adding that if an insurer wants to adjust their high yield portfolio, “ETFs are an easy way to make a change, as opposed to having to sell or buy bonds. You can adjust your tactical allocation very quickly, because the liquidity in the ETFs and the underlying indices allows it to be easily transacted.”
And though insurance companies invested in mostly investment grade ETFs, S&PDJI’s seventh annual study of ETF usage in U.S. insurance general accounts revealed that they had a higher allocation to high yield than the overall U.S. market, suggesting a larger appetite for high yield fixed income within the institutional investor space over retail. High yield ETF usage also increased by 80% since 2021.
Launched in October of 2021 to provide precision ETF exposures for fixed income investors, BondBloxx Investment Management was founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Elya Schwartzman, Mark Miller, and Brian O’Donnell. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.
In May, BondBloxx launched three new ETFs that track ratings-specific sub-indexes of the ICE BofA US Cash Pay High Yield Constrained Index. These three new products join the suite of seven sector-specific high yield ETFs that the high yield fixed income ETF issuer launched earlier this year. The firm just registered for an additional eight Treasury products that allow investors to get specific duration targets.
In a recent appearance on CNBC’s “Closing Bell: Overtime,” Gallegos explained that BondBloxx was created after its founders looked at where markets were in March 2020 and said they “need to be delivering better tools for institutional investors to manage their risk through markets like this.”
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