Insurance companies continue to own equity ETFs, but they were net sellers in the first half of 2021. According to Raghu Ramachandran, head of the Insurance Asset Channel at S&P Dow Jones Indices, insurance companies were selling out of equities and reallocating those assets elsewhere. Ramachandran's report, titled ETF Transactions by U.S. Insurers in Q2 2021, noted that the insurance industry withdrew $1.2 billion from equity ETFs, while adding $3.1 billion to fixed income ETFs.
This selling contrasts with overwhelmingly positive overall flows by investors of all types that were net buyers of $360 billion of equity ETFs in the first six months of 2021, per CFRA's ETF data. While insurance companies currently represent a small ETF investor base, they managed $7.2 trillion of investable assets at the end of 2020 and are worthy of tracking to understand usage trends.
Not All Insurers
Some of the largest insurance companies were selling ETFs in the first half of 2021. For example, Northwestern Mutual, a life insurer, sold $1.1 billion of its ETF holdings in the first six months of the year, with approximately $880 million redeemed from equity products, to lead the industry. Meanwhile, the property and casualty group of Allstate was a net seller of approximately $760 million of ETF shares, with 88% coming from equity products.
However, not all big insurers were selling in the first half. Health insurer Anthem Group was a net buyer of approximately $920 million of fixed income ETFs, according to data available on S&P Global Market Intelligence.
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While Vanguard led the ETF industry, gathering $175 billion of new money in the first half of 2021, insurers were selling some of its larger products. The Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard High Dividend Yield ETF (VYM) had the highest number of net sales in the first six months of 2021, with approximately $1.2 billion and $960 million, respectively. In addition, VOO was also among the ETFs with the five highest net sales, fourth behind the iShares Core U.S. Aggregate Bond ETF (AGG), with $235 million.
While VOO charges the same miniscule 0.03% expense ratio as the iShares Core S&P 500 ETF (IVV) and has the same ETF holdings, the iShares offering had the highest net purchases by insurance companies, with $1.4 billion, even stronger than those of the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) and the iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB).
In 2020 and the first half of 2021, insurance companies were increasing exposure to investment-grade corporate bond ETFs. CFRA thinks the high quality exposure, the liquidity, and the diversification benefits have made them an appealing choice for many institutional investors.
Insurance companies traded 31 million shares during the first half of 2021, with slightly more in the second quarter than the first quarter. While the selling of equity ETFs outweighed the buying, growing usage by institutional investors helped to provide ongoing liquidity for all investors and kept trading costs low.
The U.S. ETF industry is approaching $7 trillion in overall assets, partially due to the growing comfort that, when investors want to buy (or sell), there will be another investor at the ready to transact in a cost-effective manner.
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