Bond ETF Demand By Insurers Rising

Insurers are once again investing in ETFs, but the types of funds have changed.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

Key Takeaways

  • Fixed income ETFs represented an above-average 35% share of insurance company assets at the end of 2020, according to S&P Dow Jones analysis. Insurers were net sellers of equity ETFs last year despite a strong recovery from first-quarter lows, but the industry collectively added $5 billion to fixed income ETFs.
  • BlackRock (BLK) managed more than half of the insurance company ETF assets, aided by usage of its fixed income products and stronger exposure than peers to life insurers.
  • Corporate bond ETFs were widely purchased by the insurance industry, led by a doubling of year-end assets held in the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD). At year-end, approximately 9% of LQD were owned by insurers.

The iShares 1-5 Year Investment-Grade Corporate Bond ETF (IGSB) and the Vanguard Short-Term Corporate Bond ETF (VCSH) were also increasingly popular. Growing ETF usage by institutional investors provides enhanced liquidity for all investors.


Fundamental Context

A record 36% of U.S. insurance companies owned ETFs at the end of 2020. While the $37 billion in ETF assets for this institutional investor segment represents a tiny fraction of the then-$5.5 trillion in ETF assets held by all investors, it comprised an even smaller percentage of the $7.2 trillion of invested assets by insurance companies, according to research from S&P Dow Jones Indices based on NAIC data, creating what we see as significant potential. Those companies that previously used ETFs purchased even more ETF shares in 2020 after testing the waters in prior years.

Indeed, the number of shares held by insurance companies at the end of 2020 increased by 8.5% from the prior year, while the $63 billion of shares traded rose 10%. Despite—or because of—the market volatility in the bond market in 2020, insurance companies added nearly $5 billion to fixed income ETFs to end the year with $13 billion in assets. In contrast, insurance companies were net sellers of equity ETFs.

At the end of 2020, fixed income ETFs represented 35% share of the ETF assets held by insurance companies, nearly double their 19% share of the overall ETF market, while equity ETFs held by insurers were 64% (77%); commodities and other asset classes represented the remainder of assets.


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According to Raghu Ramachandran, head of the Insurance Asset Channel at S&P Dow Jones Indices, the continued growth in ETF usage by insurance companies comes from both new companies starting to use ETFs, and companies that already use ETFs buying more ETFs. 

Even though insurers invest mostly in fixed income securities, they had historically invested in equity ETFs. However, in 2020, these companies increased fixed income ETF usage by 52%. Ramachandran added that, in 2020, insurers traded four times the amount of fixed income ETFs they held at the beginning of the year and used the liquidity of the ETF market to their advantage.

BlackRock’s Dominant Position

BlackRock’s share of ETF assets owned by insurers is even larger than its overall market share. At the end of 2020, BlackRock managed 53% of the insurance industry’s ETF assets based on S&P Global Market Intelligence data, a greater percentage than the 37% it held of assets owned by all investors.

While Vanguard’s 27% share was in line with its broader stake, State Street Global Advisors (13% versus 15%), Invesco (1.6% versus 5.4%) and a collection of other asset managers (4.8% versus 15%) were underexposed to the insurance market. Insurance company ETF assets managed by Vanguard and State Street Global Advisors were heavily weighted toward equities, but BlackRock’s $20 billion was largely split between equities and fixed income. 

“Throughout last year’s market volatility, fixed income ETFs delivered to investors deep liquidity, continuous price transparency and lower transaction costs than were available in individual bonds,” according to Joshua Penzner, U.S. head of institutional iShares Fixed Income ETFs for BlackRock.

Penzner added that, in 2020, there was a turning point in fixed income ETF adoption, as institutional investors significantly embraced these products to effectively and rapidly navigate evolving debt markets. Asset owners, including pension funds and insurance companies, used ETFs at scale as complements            for individual bonds and other allocations to fixed income.


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Insurers Returned To ETFs In 2020

Life insurance companies returned to the ETF market in 2020. After reducing ETF assets by $1.1 billion in 2019, life insurers added $2.9 billion last year, equal to 71% of the $4.1 billion of net inflows, according to S&P Dow Jones.

Despite holding two-thirds of invested assets by insurers, life companies still hold less than one-third of the insurance industry’s ETF assets. Continued confidence in the benefits of tapping the ETF market by life insurance companies could help drive overall ETF asset growth.

While equity ETFs comprised most of the assets owned by insurance companies, ETF trading skewed toward fixed income products. In 2020, insurance companies traded $34 billion of fixed income ETFs and $28 billion of equity ETFs.

Such trading indicates that insurers took advantage of liquidity ETFs such as LQD offered as the risk-on environment emerged in the second half of 2020. Furthermore, companies became more comfortable using fixed income ETFs as the cash bond market was constrained in 2020.

Last year, nearly 8,000 transactions were made by insurers equal to $63 billion in dollar volume. While the median trade was approximately 400,000 shares, the mean trade was for 8 million, an indication that when insurers seek to trade in size, they can tap into the broader ETF ecosystem to meet their goals.

ETFs Held By Insurers

Corporate bond ETF demand soared, while broad market U.S. equity asset growth was muted. Corporate bond ETFs comprised 73% of fixed income assets owned by insurance companies at the end of December 2020, more than double their overall share in the broader ETF market. In 2020, insurance companies made net purchases of $3.9 billion of corporate bond ETFs, a fivefold increase from the prior year.

LQD assets owned by insurance companies more than doubled to $5.1 billion according to S&P Global Market Intelligence, equal to approximately 9% of the ETF’s overall assets. With $1.1 billion in ICSB, insurers held 5% of year-end assets. Meanwhile, VCSH assets held by this institutional segment increased 62% to approximately $800 million.

In contrast, insurance company assets in the SPDR S&P 500 ETF Trust (SPY) held steady in 2020 at $2.9 billion, while fellow broad market fund iShares Core S&P 500 ETF (IVV) assets held by insurers shrunk to $1.5 billion, down from $2.1 billion a year earlier, despite the underlying S&P 500 Index rising in value.

Insurers appeared more comfortable with the Vanguard S&P 500 ETF (VOO), as assets increased to $1.7 billion from $1.4 billion. Another equity ETF that grew was the Vanguard High Dividend Yield ETF (VYM). The dividend ETF’s insurance ownership was $1.6 billion at the end of 2020, up from $1.1 billion in 2019.


Figure 3: Largest ETFs Held By Insurance Companies

TickerSubcategoryInsurance AUM ($B)ETF AUM ($B)
LQDCorporate Bond5.155
SPYU.S. Broad Market2.9329
VOOU.S. Broad Market1.7178
VYMU.S. Dividend & Fundamental 1.631
VEAGlobal Broad Market1.588
IVVU.S. Broad Market1.5239
IEFAGlobal Broad Market1.284
IGSBCorporate Bond1.122
VTIU.S. Broad Market0.9202
Median 1.5 

Source: NAIC via S&P Global Market Intelligence, CFRA, as of 12/31/2020


Insurance companies also tapped into fixed income ETFs offered by more than the top three providers. For example, the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) ended 2020 with $153 million in assets held by insurers, a fivefold increase from a year earlier. Meanwhile, the Invesco Taxable Municipal Bond ETF (BAB) had $131 million in assets owned by insurance companies, up sharply from $18 million a year earlier.


As institutional investors gain comfort in a wider array of fixed income ETFs, the liquidity of these funds should improve for all shareholders and result in lower trading costs. Insurance companies still hold a small percentage of ETF assets, but growing usage is a strong signal of the potential, and why we think asset managers will be focusing more on this segment of the market.

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Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.