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.