Indexology^® Blog

As of year-end 2021, insurance companies held USD 45.4 billion in ETFs in their general accounts—a 15% increase over 2020. We recently published a research piece on the use of ETFs by insurance companies. In this blog post, we explore the increased use of fixed income ETFs in these portfolios.

Fixed income securities comprise the majority of insurance portfolios. However, equity ETFs continue to constitute the majority of insurance companies’ ETF usage, largely due to regulatory constraints. Even as regulation has changed and made it easier for insurance companies to invest in ETFs, fixed income ETF adoption was slow. Recently, that has begun to change, and insurance companies’ fixed income ETF usage has nearly doubled in the past two years (see Exhibit 1).

Again, as to be expected, investment grade funds dominated insurance companies’ fixed income ETF usage, but there has been an increase in their use of high yield ETFs (see Exhibit 2). Over the past 1-, 3-, 5- and 10-year periods, the growth rate of high yield ETFs has exceeded the growth of investment grade ETFs within insurance general accounts. In 2021, high yield ETF AUM increased by 80%, and the proportion of ETFs invested in high yield by insurance companies exceeded the proportion of high yield ETFs in the overall U.S. ETF market.

Life insurance companies have driven the growth of fixed income ETF usage. In 2015, life companies had only USD 617 million invested in fixed income ETFs. By 2021, this had grown 13 times to reach USD 7.8 billion (see Exhibit 3). Indeed, as a proportion of the usage, life companies have a majority of their ETF investments in fixed income, whereas P&C companies still continue to invest mostly in equity ETFs. Health companies also invest heavily in fixed income ETFs, but their pool of assets is much smaller than that of life and P&C companies.

Even though insurance companies tended to hold fewer fixed income ETFs, they traded them more frequently. Trade volume for fixed income ETFs exceeded the trade volume for equity ETFs in 2019, and fixed income ETFs continued to dominate insurance trading through 2021 (see Exhibit 4). If we consider the trade ratio (the amount traded in a year divided by the assets held at the beginning of the year), we see that insurance companies used fixed income ETFs much more actively than equity ETFs (see Exhibit 5).

Given the size of the insurance fixed income pool, we continue to monitor this activity for future growth.

How does profitability influence risk and return in small-cap equities and why is it important to know what’s under the hood of your small-cap index S&P DJI’s Garrett Glawe, State Street Global Advisors’ Matthew Bartolini, and ValMark Advisors’ Michael McClary take a closer look at the S&P SmallCap 600.

Value has experienced a dramatic reversal in 2022, with the S&P 500^® Value outperforming the S&P 500 Growth by 20% on a YTD basis as of May 25, 2022. Although one might expect this outperformance to be a boon for value managers, the data may indicate otherwise.

A majority of active large-cap value managers outperformed the S&P 500 Value in only 8 out of the past 20 calendar years. Seven of these eight years have something in common: Growth outperformed Value. How did the outperformance of Growth aid value managers?

Style bias enables us to answer this question. We refer to “style bias” as any systematic tendency in an actively managed portfolio. For example, some portfolios might typically tilt toward growth stocks, and we’d refer to this tilt as a growth bias. This is different from making near-term tactical allocations between growth and value. Style bias helps us disentangle these biases from genuine stock selection skill.  

Exhibit 1 shows that a majority of large-cap value managers outperformed the S&P 500 Value in 39% (31/80) of all quarters. In the quarters when the S&P 500 Growth beat the S&P 500 Value, however, the likelihood that the majority of value managers outperformed rose to 59% (26/44). When Value outperformed Growth, the odds of active outperformance for value managers fell to 14% (5/36).

As a result, the recent underperformance of Growth implies that value managers would be unable to benefit from style bias.

Another headwind has to do with the positive skewness of equity returns: in most years, only a minority of constituent stocks outperform an index, making stock selection inherently more challenging. Exhibit 2 illustrates that only 38% of the names in the S&P 500 Value have outperformed the index thus far this year, making conditions challenging for active managers, who tend to run more concentrated portfolios.

Further, the S&P 500 Value return of -5.7% is greater than the simple average of the constituent returns (-8.1%), indicating that larger value stocks have outperformed. Berkshire Hathaway Class B and Johnson & Johnson, both of which handily outperformed the index, are the largest constituents in the index with a combined weight of 6%. The outperformance of larger value names coupled with positive skewness is doubly challenging for active managers, as it is relatively more difficult for them to overweight the larger names.

Value managers have historically benefited by tilting toward Growth. But not this year. And even within the Value realm, they are not aided by the outperformance of larger names. Value investors should keep this in mind if these trends continue.

Look under the hood of an innovative, best-in-class ESG index, designed to track S&P 500 constituents with higher sustainability credentials based on exclusions and market-leading ESG scores.

Except for intermittent fasting groups or keto dieters who tend to skip it, breakfast is considered by many to be the most important meal of the day. Now, there is a reliable and publicly available benchmark for the performance of the most liquid commodities typically consumed at breakfast. The S&P GSCI Dynamic Roll Breakfast (OJ 5% Capped) is a global production-weighted index offering another example of thematic ways to look at commodities allocations within portfolios. A liquidity-based allocation to orange juice (OJ) has been incorporated into the index construction, because breakfast without OJ is like a day without sunshine. With a three-year annualized total return of 20.15%, the performance has outpaced broad equities, other asset classes and even the market standard commodities benchmark, the S&P GSCI, by 5% annualized. If breakfast commodities were its own commodities sector, it would have been the second best performing over the past three years (see Exhibit 1).

The heavy agriculture weighting of the index, at roughly 90%, is the clear main driver of performance for breakfast. Not forgetting bacon, lean hogs currently have a weight of about 10% to round out the theme. Corn and wheat make up the bulk of the index, because these two breakfast commodities are by far the most produced and consumed commodities around the world; roughly two billion tons of corn and wheat are produced each year in total. The other commodities are much smaller, and this is reflected in the current percentage weights as of the end of April (see Exhibit 2).

A growing concern among central bankers regarding food inflation serves to highlight the importance of agricultural commodities to the global economy from both a societal and environmental perspective. This new index may offer a way of gaining exposure to themes such as inflation and geopolitics. The Ukraine-Russia conflict is disrupting global food and energy supplies to an unprecedented degree. A prime example is the tightening global wheat supply picture. Ukraine is considered Europe’s breadbasket and roughly one-third of global exports of wheat comes from the Ukraine/Russia region. Wheat exports out of the Black Sea have been strained over the past few months as the conflict continues. Global wheat prices have skyrocketed, and with the high weighting in the breakfast index, wheat was an important driver in the solid performance. In response to the geopolitical tensions and persistent supply chain bottlenecks, food protectionism is returning to the fore. For example, plans by India, the world’s largest exporter of sugar, to restrict exports to prevent a surge in domestic prices could put additional pressure on global sugar supplies.

Finally, the S&P GSCI Dynamic Roll Breakfast (OJ 5% Capped) employs a flexible monthly futures rolling strategy designed to alleviate the negative impact of rolling into contango and potentially limit volatility exposure to the commodities market. With its global focus, this new thematic index demonstrates our continued efforts to bring replicable and investable commodities-based benchmarks to a public audience.