Of the more than USD 3.4 trillion invested in ETFs in the U.S., retail investors comprise the majority of the market. While pensions and endowments have been slow to use ETFs in their investment portfolios, one segment of the institutional market—insurance—has been steadily increasing their usage of ETFs. Earlier this year, S&P DJI analyzed the use of ETFs in the U.S. insurance industry, using regulatory data. These trends may offer insight for other institutional investors.
Despite a market correction in Q4 2018, insurance companies continued to increase their use of ETFs last year, holding assets in-line with long-term growth trends with USD 26.2 billion invested in ETFs. The insurance industry, however, exhibited a divergence in its investment patterns; with varying levels of investment depending on factors like size. Companies that had previously been slow to adopt ETFs increased their usage, while others that were more heavily invested in ETFs cut back.
Insurers have increasingly used ETFs in their portfolios for a range of strategic and tactical functions. Mega insurers, or those companies with more than USD 50 billion in assets, in particular, have historically employed ETFs for cash equitization, as a “liquidity sleeve” (an overlay for liquidity management), or as part of a risk barbell strategy, for example. Based on 2018 data, Mega insurers are investing more assets in ETFs than ever before, which could be a case study for other large institutions who have not yet begun investing in ETFs.
Mega insurance companies owned most of the admitted assets belonging to insurance companies in 2018, and they held approximately one-third of the insurance ETF holdings (see Exhibit 2).
What’s notable, however, is that these Mega companies increased their AUM by 39% over 2017 (see Exhibit 3).
While Large companies comprised the majority of insurance ETF assets in 2018, Mega companies were quickly reaching parity, demonstrating the greatest compound annual growth rates, across 1-, 3-, 5-, and 10-year time horizons. By contrast, Large companies’ ETF investments saw a 25% decrease in 2018.
Unlike prior years, equity ETFs—not fixed income ETFs—drove the growth in AUM from Mega insurers, exhibiting a 43% growth rate versus 2017. In 2018, equity ETFs comprised 63% of Mega insurers ETF assets invested.
As other large institutions, such as pension funds, endowments, and foundations, seek efficient and low-cost investment vehicles for their portfolios, the growth of ETF usage among mega insurers may serve as inspiration for their investments.
To learn more about the 2018 trends in ETF usage among insurers, read our latest analysis of “ETFs in Insurance General Accounts.”
 Source: Investment Company Institute