Insurance companies sold off $11.2 billion in ETF assets during 2022’s bear market, amounting to nearly a quarter of ETF assets held by the industry. While that amounts to a sliver of the $7.9 trillion of assets held by insurance companies, the trends suggest conflicting positions among one corner of the financial industry.
To learn more, VettaFi’s Dan Mika spoke with Raghu Ramachandran, S&P Dow Jones’ head of the insurance asset channel and the author of a recent report on the subject.
Dan Mika, VettaFi: The headline of this year’s report suggests almost a quarter of the ETF assets held by the insurance industry were sold off in 2022. It seems like a lot of that was explained by 2022’s bear market. However, what made that drop steeper than in 2008 or 2020, when market conditions were also difficult?
Raghu Ramachandran, S&P Dow Jones: Yes, $11 billion or so in AUM [was sold off] from 2021 to 2022, and the bulk of that was due to market valuations. But then we also had $4 billion of that in outflows. The bulk of that $4 billion in outflows was a decision by two mega companies to get out of public equities. So they sold all public equities and, consequently, all public equity ETFs. That’s an asset allocation decision, not an ETF decision. So at the end of the day, $11 billion did come out of insurance.
VettaFi: Without the decision of those two companies to leave public equities, what were the trends for ETF adoption?
Ramachandran: It was interesting. Without that asset allocation decision, we saw about $600 million come out. There was a rotation out of fixed income and into equities.
VettaFi: And that’s an alignment to the Fed hiking aggressively last year and the duration risk associated with that?
Ramachandran: That was one of the surprising things that came out of the study that we’re trying to analyze further. You would normally think that you’d want to shorten duration in a rising inflation environment. But at least in terms of ETF usage, we’ve seen companies sold out of the shorter end of the curves in terms of average maturity. Ultra-short and short have sold off, and companies added long-duration or long-maturity ETFs. I think we need to go back and try to figure out what market dynamics were there that caused that to happen.
VettaFi: So there’s not a really good answer as to why they would do that?
Ramachandran: No, the data was not released until late April. We were just getting the analysis done. I would suspect there are more market dynamics going on with respect to cash versus ETFs. It’s possible that they were trading on one and buying on the other. Still, we have to do more analysis before I could say anything definitive.
Tracking the Trends
VettaFi: What were the trends on the equity side?
Ramachandran: I think the most significant thing we saw in terms of equity allocation, outside of two companies rotating out, was an increase in the use of sector ETFs and using that to rotate and take positions. There are 13 sectors, and they could say, “I’m constructive on a particular sector, like, say, technology. I’m not constructive on a particular sector like consumer staples”—whatever your position is. As a portfolio manager, you can change those weights to express the position. We’ve seen the use of that because you can use sector ETFs to trade a full sector all at once. There was a 20% to 23% increase in use of sector ETFs last year.
VettaFi: Was it more of an equal weight approach? Or was there a particular sector action that would suggest the insurance industry was getting more defensive or being more risk-on?
Ramachandran: They added to technology, and interestingly they sold out of financials. Insurance companies have historically, and still continue to have, an overweight to financials partly because of dividends, which act as income for insurance companies.
VettaFi: Zooming out, the report suggests if trends hold, ETF AUM for insurers is going to double by 2027. How much confidence is there in continued adoption by the insurance industry and by other financial institutions in the current market environment? The Fed funds rate is the highest it’s been in 15 years, and recession warnings have been flashing for months.
Ramachandran: We don’t make market predictions, and we don’t make statements on where we expect the markets to go. That’s not the point of this exercise. We’re trying to show in that report that there have been bumps up and down. However, we’ve seen consistent growth historically. If that history is maintained, we would see growth. [2021’s] trends were that the flows were above trend, [and 2022’s flows were] below trend.
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