Another very interesting article from Leslie Scism of the Wall Street Journal (article can be viewed by clicking here).
A continuation of the discussion thread on low fee annuities that can be viewed by clicking here.
The Journal article discusses variable annuities and the impact that relatively inexpensive ETFs are having on product development.
A Western and Southern Financial Group variable annuity is referenced. This variable annuity runs at 2.5% - 2.7% when fully loaded (living benefits, etc). Blackrock and Vanguard are the ETF partners.
A couple of very interesting points that I was not aware of:
- It is apparently much easier for insurers to hedge a portfolio that consists of ETFs rather than XYZ active fund manager. Easier apparently to match ETFs with the appropriate hedge (which is going to be index-based itself). Less basis risk to deal with during the hedging process I guess.
- ETFs in a VA present regulatory/tax challenges because variable annuity portfolios must adhere to strict asset allocation parameters in order to maintain tax advantaged status. Allowing individuals to customize their own portfolios of ETFs would potentially run afoul of this regulation.
Last, Milliman and ValMark Securities (an independent broker-dealer) are developing what sounds like a very innovative approach to variable annuity costs. The innovation is based on moving part of the hedging program from the insurer's balance sheet to the portfolio of ETF--then passing along cost savings to the consumer. Hopefully more to come on this development.
