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Insurers begin staking their claims in ETF territory

The asset management businesses of major insurers are not known to be particularly aggressive in product offerings or business strategies.

But the ongoing expansion of the exchange-traded fund market has spurred several large insurers to finally put stakes in the ground, through a mix of acquisitions and launches.

And, unlike many fresh entrants to the ETF business, these insurers are able to bring advisers, customers and assets that startup ETF managers often lack.

"There are circular benefits for these companies and issuers," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA in New York. "And it's just hard to justify bringing out new products as traditional mutual funds these days. But third-party investors need to be mindful of liquidity."

Low trading volume can be a deterrent to smaller advisers and retail investors who have been taught to factor trading spreads into product decisions. For example, said Mr. Rosenbluth, three ETFs issued by Nationwide Asset Management in September have more than $100 million in assets but only trade about $5,000 per day.

But Mr. Rosenbluth believes the products offered by insurers' asset management businesses will remain viable. Of the 82 products from eight managers whose parent company's business includes insurance underwriting, 70% have at least $25 million in assets, according to research firm Factset, in line with the ETF market as a whole.

Yet the commonality among these issuers relates only to their core business of insurance and recent entry into the ETF market.

New York Life Investment Management, for example, bought boutique ETF manager IndexIQ LLC in 2015 and now supports 21 ETFs and $3.7 billion under management on that platform. The $1.1 billion IQ Hedge Multifactor, which holds ETFs of other issuers, remains its largest ETF.

TIAA-CREF and The Hartford Financial Services Group also opted for acquisition: TIAA, which picked up municipal bond specialist Nuveen Investments Inc. for more than $6 billion in 2014, has recently focused on the market for ETFs indexed to environmental, social and governance factors, managing $450 million in ETFs; and Hartford Funds acquired startup manager Lattice Strategies LLC in 2016 and manages $420 million in ETFs.

The John Hancock unit of Manulife Financial, on the other hand, attempted to storm the market with the first ETFs built on indexes developed by adviser darling Dimensional Fund Advisors LP; those 13 products have attracted just $1.15 billion in aggregate in 2.5 years.

Insurers buy into ETFs
Ranked by total ETF assets under management, in millions, as of Jan. 26, 2018.
of ETFs
IndexIQ (NYLIM)$3,726.8 21
Principal Financial Group$2,512.9 12
John Hancock$1,153.8 13
Transamerica$905.5 4
USAA Asset Management$570.2 6
Nuveen$453.7 11
Hartford$423.2 11
Nationwide Fund Advisors$371.8 3
Source: FactSet

Recent efforts — with a groundswell of issuance this past fall, including Nationwide — are more homegrown.

After evaluating the ETF market for several years, Transamerica Asset Management, the investment unit of Transamerica, a unit of Dutch insurer Aegon NV, opted to launch its own "risk-managed" funds known as DeltaShares. Chicago-based Milliman Financial Risk Management LLC, which had once set its sights on serving as an independent issuer, is subadvising.

"We're working with a subadviser we know well and a high-quality index provider in S&P," said Tom Wald, Denver-based chief investment officer of Transamerica Asset Management.

"DeltaShares offer a differentiated investment solution and are held within some of our variable annuity subaccounts as they help to provide lower cost and lower turnover to those products."

"There remains a lot of opportunity in designing products for target-date strategies and asset allocation pools," said Paul Kim, managing director of ETF strategy at Principal Global Investors, the unit of Des Moines, Iowa-based Principal Financial Group Inc, managing $430 billion in assets. At a 0.12% expense ratio, the Principal U.S. Mega-Cap Multi-Factor Index ETF holds $1 billion in assets following its October launch.

USAA, the financial services firm primarily serving military families with insurance products, has long been an active user of ETFs within its asset allocation mutual funds, but only in October did the company launch a suite of equity and fixed-income ETFs. (USAA had indicated in previous SEC filings that it was looking to access the mutual fund share class structure of ETF issuance now used only by The Vanguard Group Inc.)

And finally, four years after first indicating its interest in offering ETFs, Newark, N.J.-based Prudential Financial is on the verge of entering the market. In mid-January, the company's PGIM unit, which manages more than $1 trillion, filed that it is looking to offer an actively managed ultra-short bond ETF.