The U.S. insurance industry’s asset base in ETFs grew 15% to $45 billion at the end of 2021, according to a recently published research piece from S&P Dow Jones Indices. While insurance companies owned a very small slice of the then $7 trillion ETF market, the asset base for many ETFs is increasingly supported by this small but emerging institutional investor base.
Raghu Ramachandran, head of the insurance asset channel at S&P Dow Jones Indices and the author of the report titled “ETFs in Insurance General Accounts – 2022,” noted that in 2021, fixed income ETF usage grew by 23% and ended the year representing 36% of insurance company ETF assets.
This is more than double the fixed income market share for the broader U.S. ETF market and provides a boost for the future. Recent growth has been strongest among life insurers, which as a group have 60% of ETF holdings in fixed income ETFs.
Insurance companies also were more likely to trade fixed income ETFs than equity products last year. While the average ETF, regardless of asset class, traded 1.6 times its value from the beginning of 2021, fixed income ETFs traded more than 2.0 times and corporate bond ETFs traded more than 3.0.
“We continue to see increased adoption of fixed income ETFs by the U.S. insurance industry,” said Ramachandran. “This is not surprising as the vast majority of insurance assets are already held in fixed income products. The benefits of indexing, including transparency, low-cost and efficiency, are likely driving this growth and among the reasons why insurance companies are adding more ETFs in their general accounts.”
A recent paper entitled “All systems go” from BlackRock noted that institutional investors are turning to bond ETFs in part for durable and consistent liquidity as compared with individual bonds, particularly in stressed markets. In addition, these investors are seeking efficiency, since bond ETFs allow for instantaneous and cost-efficient exposure to hundreds or thousands of individual bonds in a single trade on an exchange.
In 2021, high yield corporate bond ETFs experienced 80% growth based on asset ownership from insurers, according to Ramachandran.
According to data from NAIC via S&P Global Market Intelligence, at the end of 2021, insurers owned $1.1 billion of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) (equal to 5.1% of its overall asset base), $444 million of the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) (8.1%), and $229 million of the VanEck Fallen Angel High Yield Bond ETF (ANGL) (4.2%).
Meanwhile, the three ETFs with the highest percentage of assets owned by insurance companies were also fixed income products: the iShares iBoxx $Investment Grade Corporate Bond ETF (LQD) at 13%, the SPDR ICE Preferred Securities ETF (PSK) at 8.9%, and the PGIM Ultra Short Bond ETF (PULS) at 8.3%. The ownership of LQD might be surprise, as it is one of the oldest fixed income products around, and it is a go-to vehicle for advisors and a range of institutional investors gaining access to high-quality corporate bonds.
BlackRock had eight of 10 ETFs with the highest percentage owned by insurers with equity products, with the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) and the iShares MSCI ACWI ex U.S. ETF (ACWX) as two equity ETF examples.
The continued usage of equity and fixed income ETFs by insurance companies is a positive for all investors, as large buyers and sellers help to keep trading costs low.
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