“Regulatory change is definitely important” in enhancing the appeal of bond ETFs, Mr. Wirtala said.
ETF issuers like BlackRock Inc., The Vanguard Group Inc. and SSGA would appear to agree, as indicated by the letters each submitted to DFS last fall regarding the then-proposed DFS regulatory change.
In an Oct. 6, 2021, letter to DFS expressing its support for the proposed regulation, BlackRock said bond ETFs have “transformed the way that many institutional investors access the corporate and government bond markets” and that many investors see them as “a complement to, or a direct substitute for, individual bonds.”
Bond ETFs are “key investment and risk management tools that may function more efficiently than individual bonds, particularly during periods of market stress,” the letter said, a strength that the letter said was demonstrated during the COVID 19-related market volatility of March 2020.
Big ETF issuers — particularly BlackRock, which managed $715 billion in fixed-income ETFs globally as of March 4 — have put in a lot of effort with regulators to help make bond ETFs more appealing to insurers, according to Ben Johnson, Chicago-based director of global exchange-traded fund research for Morningstar Inc.
BlackRock declined to comment beyond its letter.
“ETF issuers have every incentive to sell more ETFs,” Mr. Johnson said. “So, they are going to kick down every door they can kick down. Of course, they are going to knock politely first.”
The insurer market is “a meaningful market, specifically for fixed-income ETFs,” he said.
For insurers, “it’s all about asset-liability management and cash flow and liquidity needs,” said Gregory H. Cobb, vice president, investment strategy at Sage Advisory Services, Ltd. Co. , an independent investment advisory firm with more than $17 billion in assets under management or advisement.
“And you really can’t do asset-liability management very well with equities,” said Mr. Cobb, who is also director of insurance solutions at Austin, Texas-based Sage
A portfolio of individual bonds allows insurers to own securities that have cash flows and maturities tailored to match the insurers’ expected cash flows and liability streams, Mr. Cobb said.