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Forget Vanguard, Insurers Now Have Their Own ETFs to Sell You

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Caution is in their DNA, but that hasn’t stopped insurers from jumping into the craze for exchange-traded funds with both feet.

Already some of the fastest-growing institutional buyers of ETFs, these conglomerates are now issuing them to compete with conventional money managers such as Vanguard Group and BlackRock Inc. They’re betting that brand names built on protecting your future can steal away assets — and it seems to be working. Insurers’ home-grown funds now oversee more than $25.3 billion, up from just $1.9 billion five years ago.

With low interest rates weighing on the business of selling life policies, asset management — which generates fees while tying up less capital — has become an essential diversifier for insurance companies. And simple, quick and relatively cheap-to-set-up ETFs are an ideal vehicle for insurers looking to boost their bottom line, particularly if they can just repackage their tried-and-tested strategies.

(Related: It’s Smart to Worry About the Risks ETFs Pose)

“Passive is impacting flows in the asset management industry,” John Barnidge, an analyst at Sandler O’Neill & Partners LP, said in a phone interview last month. “They’re probably trying to fight back a little bit, accepting that it’s part of the reality and doing their own ETFs.”

United Services Automobile Association started its first ETFs in October, while Principal Financial Group Inc. introduced four since the start of last month to boost its stable of strategies to 12, data compiled by Bloomberg show. New York Life Insurance Co. has 23 ETFs after buying IndexIQ in 2015, while TIAA’s Nuveen Investments unit has 11 after hiring Martin Kremenstein that year to develop its ETF business.

Even Prudential Financial Inc., the largest U.S. life insurer by assets, is exploring ways to enter the market through a unit of its $1 trillion asset manager, PGIM, a person familiar with the matter said in September. Nationwide Mutual Insurance Co., one of the top 10 home and auto insurers in the U.S., joined the game this year.

“When you have multiple insurers with an ETF program then you want to jump in,” said Paul Kim, head of ETF strategy at Principal, who’d like to have as many as 30 funds within five years. “It’s a rational competitive response.”

Increasingly Familiar

It wasn’t always so.

A race to the bottom on fees initially made Principal steer clear of ETFs, according to Jim McCaughan, who leads the insurer’s asset manager. But the rise of actively managed funds — which typically charge more — changed all that by offering the company a way to couple its existing capabilities with more efficient distribution, he said. Prudential’s Stephen Pelletier, who runs the company’s U.S. operations, echoed that sentiment last week when he said his firm would potentially focus more on active ETFs since the passive space is “ thoroughly spoken for.”

Insurers are jumping in after using ETFs to manage their own money. Almost half of those surveyed by Greenwich Associates for a report last year said they’d started using ETFs within the past two years, and almost 25% started buying within the previous 12 months.

A regulatory change will make these funds even more attractive to invest in. The shift will tweak the accounting treatment of ETFs for insurers in a move that could lead them to add more than $300 billion to debt ETFs alone over the next five years, according to BlackRock, the largest U.S. ETF provider.

“As people are becoming more educated and more familiar with ETFs, you’re seeing the usage of them increase proportionately,” Lance Humphrey, a money manager in the global multi-assets team at USAA, said Oct. 24. The San Antonio-based company is using what it learned investing $5.5 billion in these funds to build its own ETFs.

Standing Out

Other insurers are doing the same. And, as both investors and issuers of ETFs, they have a secret weapon: their own capital.

Principal’s biggest fund, the Principal Active Global Dividend Income ETF, grew in less than six months into one of the largest active equity ETFs in the U.S. with more than $450 million — almost entirely thanks to its own money. Similarly TIAA owns almost 40% of Nuveen’s Nushares Enhanced Yield US Aggregate Bond ETF, and New York Life’s money management unit owns more than 50% of IndexIQ’s IQ 50% Hedged FTSE International ETF.

That’s a huge boon, since with scale comes access. Wirehouse brokers often require a minimum amount of assets in a fund before they’ll offer them to clients, and some investors are restricted from buying smaller funds. By putting in their own money, insurers can leapfrog this hurdle and get their products in front of outside investors almost immediately.

Still, with more than 2,000 ETFs competing for investor assets in the U.S. alone, these nascent issuers have to stand out in an already crowded market.

Unique Expertise

That’s what Aegon NV’s Transamerica Corp. was aiming for with the new batch of ETFs it introduced in August, according to Tom Wald, chief investment officer for the company’s asset management unit.

Transamerica’s four funds specifically look to mitigate risk during times of volatility, limiting the amount of hedging that an investor — such as an insurer — would have to do to protect itself. The strategies mimic managed-risk mutual funds but could be cheaper, according to Joe Becker, director of portfolio strategy for Milliman Financial Risk Management, which subadvises the ETFs.

“We didn’t want to just be another ‘me-too’ competitor out there chasing the herd,” said Wald, adding that his funds could be used in the investment portfolios that back an insurer’s policies or in variable annuity products. “If you’re going to be successful in the ETF market, you really have to have a differentiated product.”

—Read Nationwide Joins Insurers’ Move to Passive With Smart-Beta ETFs on ThinkAdvisor.

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