Survey: Exchange-Traded Funds & Active Fixed Income Management for Insurance Companies
How have Fixed Income ETFs impacted active managers in the insurance space?
By design, insurance companies are never fully diversified; heavily allocating their portfolios towards investment-grade fixed income to account for policy holder obligations, reserves, and sufficient risk capital. Whether conducted internally or externally, insurers’ fixed income allocations have predominantly been actively managed via a separate account. However, within the overall bond market, Fixed Income ETFs have become a pillar of the sector.
Given this shift, our team at Strategic Asset Alliance (SAA) conducted a survey focused on the impact that fixed income ETFs have had on active investment-grade fixed income managers working in the insurance space. This report summarizes our key findings.
Executive Summary:
- Most firms view the rise of Fixed Income ETFs as a positive development in the bond market, particularly for liquidity, transparency, and diversification access, even if it technically generates greater competition for their firm.
- The growing prominence of Bond ETFs has essentially had no (or little) effect on firms’ active management process.
- In the long-running debate of active vs. passive management, over a third of firms see a shift in the pros/cons of the debate.
- Most firms say active management fee schedules for fixed income management have been compressed (lowered) due to the growth of the Bond ETF market.
- While firms were split, the main area where technology has helped active bond management is operational efficiency.
- A small majority of firms still find the Bloomberg Barclay U.S. Aggregate Index to be an appropriate benchmark for fixed income portfolios.
- Nearly every firm believes the biggest impact Bond ETFs have had on fixed income markets is in liquidity or pricing.
- While most firms agree that A.I. will help both active and passive management in some way, it is still too early to truly tell the role that it will play.