In the first quarter of 2021, more than half of the dollar volume of ETFs traded by insurance companies was made up of fixed income ETFs. This is impressive because the asset class accounted for 35% of assets at the end of 2020. Insurers traded $ 15 billion worth of ETFs in the first three months of 2021, with $ 8 billion in fixed income products. , $ 7 billion in stock offerings and a negligible amount of other assets, according to the S&P Dow Jones indices. While net equity ETF purchases were made in January and February, insurers were net sellers of the asset class in March. In contrast, bond ETF purchases were persistent throughout the quarter, accelerating in the last month of the quarter.
“Insurance companies continue to increase their use of fixed income ETFs,” said Raghu Ramachandran, insurance asset channel manager at S&P Dow Jones Indices. “Large insurance companies use ETFs to access bond liquidity, while life insurance companies are large traders of fixed income ETFs. This continued adoption by insurance companies at all levels has resulted in 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/
The CFRA recently covered the 2020 trends in a thematic research article titled “Fixed Income ETF Demand by Insurers is Accelerating” at the end of May. While the dollar value of ETF trades by insurance companies remains low, the institutional investor segment had $ 7.2 trillion in investable assets at the end of 2020, of which less than 1% was invested in ETFs. The increasing comfort with ETFs will sharply increase this figure in the years to come.
Eight of the top 10 net ETF purchases were fixed income products. As investors collectively repurchased $ 10 billion of LQD in the first quarter of 2021, according to CFRA data, insurance companies added $ 1.1 billion of quality corporate bond ETFs to their coffers. net – the most for all products based on data from S&P Global Market Intelligence. . Prudential Financial, TIAA, and Voya Financial were among the life insurers that were net buyers of LQD. Likewise, insurers 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, although these products High yield bonds suffered net outflows from other investors. .
In addition to their purchase of SHYG, insurers were heavy buyers of less interest rate sensitive investment grade products, including index products. IShares Short-Term Corporate Bond ETF (IGSB) and SPDR Portfolio Short-Term Corporate Bond ETF (SPSB) with active management JPMorgan Ultra-Short Income ETF (JPST) and ETF PIMCO Enhanced Short Maturity (MINT). CFRA’s star ratings for ETFs currently reward fixed income funds that take risks to generate higher returns.
The ten ETFs with the highest net purchases by insurance companies in the first three months of 2021 benefited from $ 3.1 billion in transactions, although as a group they recorded $ 11 billion. dollars in net outflows across the industry. Insurance companies have provided much needed liquidity for some underprivileged products.
Insurance companies were net sellers of four of the largest international products in developed and emerging markets in the first quarter of 2021. IShares Core MSCI Emerging Markets ETF (IEMG) had the highest overall net sales at $ 312 million, but IShares Core MSCI EAFE ETF (IEFA), iShares MSCI EAFE ETF (EFA **), and Vanguard FTSE Developed Markets ETF (VEA) had just over $ 440 million in combined net sales in the first three months of the year.
In contrast, IEMG’s older and more expensive brother in emerging markets, EEM, stood out among its international equity ETF peers, with around $ 300 million in net purchases by insurers.. EEM was bought by a few P&C insurers, including Erie Insurance and Liberty Mutual.
As institutional investors become more comfortable with a wider range of ETFs, the liquidity of these funds should improve for all shareholders and lead to lower trading costs. Insurance companies still own a small percentage of ETF assets, but increasing use is a strong signal of the potential of ETFs, we believe, and why we believe all asset managers will focus more on this segment of the market. . During the first quarter of 2021, insurance companies were buyers of ETFs which were sold by other market segments.
Todd Rosenbluth is Director of ETF and Mutual Fund Research at CFRA.