New Rule Could Up Insurer Demand for Fixed Income ETFs | ETF Trends

A rule change from the NY Department of Financial Services could increase the demand for fixed income ETFs from New York State-based insurance companies, according to Fitch Ratings.

Through the new rule 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. Ultimately, this new rule makes it easier for insurance companies to hold bond ETFs in their portfolios.

“The new rule reduces the amount of capital insurers must hold against bond ETFs that meet certain criteria, which may lead NY-based insurance companies to allocate more assets to these ETFs,” said Greg Fayvilevich, senior director at Fitch Ratings.

U.S. life, property, and casualty insurers increased their bond ETF holdings to $10 billion in 2020 from $3 billion in 2016, showing a desire from investors for more liquidity and the ability to adjust overall portfolio allocations more easily.

The idea that this regulatory change could spur greater usage of fixed income ETFs among NYS-based insurers was reiterated during a Fitch Ratings webinar on February 3. As reported by Pensions & Investments, webinar panelist Ilene Kelman, a regional director in the insurance general accounts group at Vanguard Group, said that the change will likely lead to more insurers using fixed income ETFs — and this includes both insurers that have never used them and those that have only used them sparingly.

Kelman said that many insurance companies use ETFs “initially as a placeholder to eliminate cash drag, and I jokingly call it ‘the gateway ETF’… and then when they see how well it works out, we see them start to use ETFs both tactically and strategically.”

The Vanguard executive added that she’s been fielding calls asking about this regulatory change “from companies all over the country,” not just from those domiciled in New York.

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%.

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