Insurance Companies Driving Institutional Use Of ETFs

Earlier this year, the report, "Institutional Investment in ETFs: Versatility Fuels Growth" from Greenwich Associates, commissioned by BlackRock, the world's largest issuer of exchange-traded funds, said institutional investors were expected to continue increasing their use of ETFs.

The study surveyed 183 institutional investors regarding their ETF use, including 41 asset managers, 51 institutional funds (pensions, endowments and foundations), 47 RIAs, 24 insurance companies and 20 investment consultants.

How Insurance Providers Fit In

Focus on insurance providers for a moment because fresh data suggest these companies are among the drivers of institutional use of ETFs.

Insurance companies owned $15.4 billion of exchange traded funds in their general accounts at the end of 2015, up from $14.1 billion in 2014 and $13.0 billion in 2013, according to National Association of Insurance Commissioners (NAIC) data gathered by S&P Global Market Intelligence. Insurance companies only hold 1.3 percent of their surplus as regards policyholders in ETFs, but usage has become prevalent and is likely to increase given the wide array of low-cost passive products that can support both broad and narrow investment strategies, said S&P Capital IQ in a note out Thursday.

The research firm notes that insurance company use of ETFs doubled in the 10-year period ended last year and that it is expected to double again over the next five years.

Insurance Companies Like These ETFs

ETFs favored by insurance companies include some familiar names, such as the Vanguard Short-Term Bond ETF (NYSE:BSV), iShares Core MSCI EAFE Index (iShares Trust (NYSE:IEFA)) and SPDR S&P 500 ETF Trust (NYSE:SPY). SPY is the world's largest ETF.

Those ETFs are held by USAA Insurance Group, which has $1.6 billion in ETF assets, the most in the insurance industry, according to S&P Capital IQ. USAA also holds some smart beta ETFs, including the iShares Edge MSCI USA Quality Factor ETF (iShares Trust (NYSE:QUAL)) and iShares Edge MSCI Momentum ETF (iShares Trust (NYSE:MTUM)).

New Jersey Manufacturers Insurance, a property and casualty company, had the third most assets in ETFs with $633 million in assets, but this was 26 percent of its surplus. IVV was the largest holding, but sector focused ETFs, such as Financial Select Sector SPDR Fund (NYSE:XLF) was also present, said S&P Capital IQ.

S&P Capital IQ notes that property and casualty insurers held more equity ETFs than did health insurance providers. Other insurance providers using ETFs include Allstate Corp and Federated Mutual Group.

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Disclosure: Todd Shriber owns shares of XLF.