Biggest ETF Trend Under Your Radar
A surprise newcomer is disrupting the ETF business in a big way.
Major insurance companies have launched six of the largest most popular new ETFs of 2017 (eight, if you count Principal, which derives a significant minority of its revenues from insurance sales):
Biggest ETF Launches of 2017, by AUM (highlighted ETFs owned by insurance companies)
Ticker | Fund | AUM ($M) | Inception Date |
454.18 | 5/10/2017 | ||
453.28 | 1/12/2017 | ||
402.73 | 8/2/2017 | ||
253.43 | 5/16/2017 | ||
238.55 | 8/2/2017 | ||
194.80 | 9/5/2017 | ||
175.63 | 6/8/2017 | ||
132.84 | 6/6/2017 | ||
126.98 | 8/2/2017 | ||
120.62 | 9/18/2017 | ||
118.37 | 5/24/2017 | ||
113.91 | 4/28/2017 | ||
113.43 | 4/5/2017 | ||
113.12 | 9/18/2017 | ||
108.98 | 10/11/2017 | ||
108.18 | 9/18/2017 | ||
106.79 | 2/15/2017 | ||
104.15 | 6/27/2017 | ||
103.16 | 2/10/2017 | ||
93.91 | 3/21/2017 |
Source: Bloomberg. Data as of Oct. 23, 2017. Insurance companies are highlighted in yellow; Principal is marked in pink.
Three of those mega-launches—four, again, if you count Principal—occurred in the last month alone.
That makes insurance companies the Kool-Aid Man of ETF issuers, crashing into the industry to become the breakout stars of 2017.
Yet insurers-turned-issuers are still few in number, and total assets in their funds remain relatively small. As of Oct. 26, only six insurers—John Hancock, Transamerica, Nationwide, Hartford Funds, Principal and now USAA—had issued their own ETFs. (For a full list of ETFs, see the table at the end of this article.)
All told, the 46 ETFs these companies have issued account for just $3.7 billion in assets—chump change compared to the rest of the $3 trillion ETF market. Yet $3.7 billion represents significant market share for a bunch of newcomers, especially in a marketplace that has become increasingly difficult for new entrants to survive.
‘Bring Your Own Assets’
Before we go further, however, we ought to clarify what we mean by "insurance company," because it isn't as straightforward as you might think.
Many insurers exist as branches of larger asset management or financial services firms. Fidelity sells insurance, for example, as does Charles Schwab and Goldman Sachs. But for these firms, insurance doesn't represent their main—or even a significant—source of revenue.
For our purposes, we define "insurance company" as a firm for whom insurance represents a primary or significant source of revenue, even if that vertical is just one of a larger umbrella of financial service offerings. The distinction is important, because the six insurers who've launched ETFs have done so by separating out their ETF operations into wholly owned but independent business lines. For instance, John Hancock Investment is separate from John Hancock Life Insurance Co., and so on.
Built-In ETF Customers
"We carry the same name, obviously, but actually we operate very separately from the insurance side," said Andrew Arnott, CEO of John Hancock Investments.
Yet existing under the same umbrella is key, because it gives insurance companies a huge advantage over other ETF issuers; namely, they already have built-in customers for their products.
Many large insurers like Transamerica and USAA have already launched self-branded mutual funds, funds-of-funds and so on. Existing client assets in these products, therefore, can serve as supersized seed capital for new ETFs.
Take John Hancock, which in 2015 became the first insurer to launch ETFs. According to 13F filings compiled by WhaleWisdom, the top investor in John Hancock's five largest ETFs is none other than John Hancock's parent company, Manufacturers Life (ManuLife). Their ETFs are sprinkled into the portfolio of the company's top-level asset allocation fund-of-fund.
"We like to eat our own cooking," said Arnott.
This is a big reason so many insurers have been able to achieve significant scale so quickly, said Eric Balchunas, ETF analyst for Bloomberg Intelligence: "It's a B.Y.O.A.—bring your own assets—party now."
Expect Natural Inflow Wave
At the moment, flows going into insurers' ETFs are "mostly from transitioning existing clients," he said, but as these funds continue to grow, "we'll likely expect natural flows to take over."
Launching ETFs in-house also helps insurers mobilize new strategies more quickly. USAA, which launched six new ETFs on Oct. 26, has no smart-beta mutual funds of its own. It originally filed in 2016 for a Vanguard-esque model that would have offered ETFs as share classes of mutual funds, but the approval process proved to be too time-consuming.
"It would have taken too long to go that [share class] route, so we decided to create new products as a faster way to come to market," said John Spear, CIO of USAA Mutual Funds, in a call announcing the funds. "We may choose to use the share class model on future ETFs."
Forget Vanilla Funds
What's particularly intriguing are the kinds of ETFs these insurers have been launching. Almost without exception, insurers have eschewed passive, vanilla funds in favor of smart-beta, multifactor and even active ETFs.
John Hancock, for example, manages a series of ETFs based on indexes by Dimensional Fund Advisors. Known for their multifactor indexes and Nobel Laureate research, DFA was doing smart beta before it was cool.
"It was clear to us that there wasn't much value we could add by offering another S&P 500 ETF," said Arnott. "But the DFA engine is differentiated, unique."
Transamerica, meanwhile, has launched DeltaShares, a series of managed risk smart-beta funds that cleave to a designated volatility level. Should that volatility cap be exceeded, the ETF's benchmark shifts weight from its component equity index to one or both of its fixed-income subindexes. If volatility remains low, however, more weight is allocated to equities.
New ETF Twist
The concept isn't new, but it is for ETFs, says Tom Wald, CIO of Transamerica Asset Management.
"The ability to enhance risk-adjusted returns over entire market cycles, to participate in rising equity markets, yet still mitigate downside during falling markets, that's something we don't believe really exists in the ETF market right now," he said.
USAA has also launched new strategic twists on an old theme. Four of its new funds use value and momentum together as factors, while the remaining two bond ETFs are actively managed.
"There are many multifactor ETFs, but we didn’t find many that explored the benefits of putting value and momentum together from a correlation standpoint and benefits to performance,” said Lance Humphrey, portfolio manager for USAA's global multi-assets.
Nationwide, for its part, has yet to commit to a single strategy, instead launching a handful of risk-based smart-beta ETFs in September, while also filing for funds that would use two different types of active exchange-traded product structures: NextShares, by Eaton Vance; and ActiveShares, by Precidian. Neither type of fund structure would require daily disclosure of holdings. (Nationwide did not respond to requests for comment in time for publication.)
‘Grassroots Demand’ ETFs
If you think you're seeing a lot of insurer-backed ETFs in the marketplace now, just wait.
Transamerica has already received and is sitting on approval for an emerging markets managed risk ETF, while Nationwide has two additional "maximum diversification" ETFs still in registration.
John Hancock, meanwhile, plans to launch a 13th DFA-based ETF later this year, along with three other ETFs currently in registration. The company is also currently working with subadvisors to release ETFs based on their methodologies on the John Hancock platform.
"I can see our ETF platform one day being as big as our traditional 40 'Act platform," said Arnott.
Additional entrants are already looking for room to enter the market, too. Prudential, which first filed for ETFs back in 2014, has finally gained regulatory approval, and the company is reported to have begun building out its ETF management business in earnest.
Other insurers have decided to get their foot in the door by buying up existing ETF issuers. In 2014, NY Life purchased IndexIQ, makers of 23 ETFs, including the IQ Hedge Multi-Strategy Tracker ETF (QAI). That same year, TIAA (then TIAA-CREF) purchased Nuveen Investments, which manages 11 ETFs under its NuShares brand. Nuveen is said to be considering how to repackage some of its illiquid investments, such as timber or agriculture, in an ETF wrapper.
And some ETF issuers were already owned by insurance companies when they first entered the marketplace. For example, PIMCO is a subsidiary of German insurance giant Allianz, while OppenheimerFunds' parent company is MassMutual Life Insurance.
"Grassroots demand from their clients" will propel more and more insurers to enter the ETF space and release more and more ETFs, says Balchunas.
"It's part of this long, glacial shift away from the mutual fund structure and toward the ETF structure," he noted. "It's reached the tipping point."
ETFs Issued by Insurance Companies
Name | Ticker | Fund | Expense Ratio | AUM ($M) | Spread % |
0.35% | $375.46 | 0.15% | |||
| 0.45% | $253.60 | 0.28% | ||
| 0.45% | $53.54 | 0.59% | ||
| 0.50% | $51.42 | 0.20% | ||
| 0.50% | $50.61 | 0.29% | ||
| 0.50% | $38.69 | 0.29% | ||
| 0.50% | $34.01 | 0.57% | ||
| 0.50% | $23.49 | 0.21% | ||
| 0.50% | $22.03 | 0.31% | ||
| 0.50% | $20.08 | 0.34% | ||
| 0.50% | $18.12 | 0.25% | ||
| 0.50% | $16.25 | 0.32% | ||
TransAmerica | 0.35% | $402.25 | 0.12% | ||
| 0.50% | $239.60 | 0.44% | ||
| 0.45% | $126.89 | 0.17% | ||
| 0.45% | $57.78 | 0.23% | ||
Nationwide | 0.42% | $120.84 | 0.36% | ||
| 0.30% | $112.85 | 0.12% | ||
| 0.34% | $108.23 | 0.16% | ||
Hartford Funds | 0.39% | $141.99 | 0.50% | ||
| 0.59% | $47.05 | 0.37% | ||
| 0.29% | $35.21 | 0.23% | ||
| 0.39% | $20.23 | 0.12% | ||
| 0.39% | $20.04 | 0.20% | ||
| 0.56% | $18.30 | 0.22% | ||
| 0.44% | $15.51 | 0.16% | ||
| 0.45% | $9.50 | 0.31% | ||
| Hartford Multifactor Low Volatility International Equity ETF | 0.39% | $5.42 | 0.39% | |
| 0.29% | $3.92 | 0.22% | ||
0.58% | $455.19 | 1.39% | |||
| 0.65% | $291.81 | 0.55% | ||
| 0.38% | $287.46 | 0.47% | ||
| 0.12% | $109.06 | 0.10% | ||
| 0.55% | $30.25 | 0.07% | ||
| 0.45% | $9.56 | 0.71% | ||
| 0.29% | $9.21 | 0.28% | ||
| 0.29% | $7.65 | 0.44% | ||
| 0.42% | $7.62 | 0.48% | ||
| 0.29% | $3.76 | 0.09% | ||
| 0.29% | $3.78 | 0.14% | ||
USAA | 0.35% | $25.00 | - | ||
| 0.40% | $25.00 | - | ||
| 0.20% | $5 | - | ||
| 0.25% | $5 | - | ||
| 0.35% | $10 | - | ||
| 0.45% | $10 | - |
Contact Lara Crigger at lcrigger@etf.com
