Investments Held by Exchange Traded Funds

Course: Insurance Planning
Lesson 19: Immediate Annuities – A Tax-Advantaged Income Planning Tool

Student Question:

Hi-

The text on this page says the annuities don’t hold mutual funds or ETFs.  What are they holding to provide an S&P “type return?” The text goes on to discuss components that sound a lot like ETFs (mid value, large global…).

Thanks!

Jody


Instructor Response:

Hi Jody, 

The insurance company does not generally invest in equities but may invest in sub-investment grade (high-yield) fixed income securities.  The interest rate paid in a fixed indexed annuity is not equal to the S & P return but is rather “linked” to the return.  For example, the annuity owner may receive interest credits of 50% of the S&P 500 gain, subject to rate caps and other fees.  Annuities invested in fixed income products are not considered “securities” by the SEC and a FINRA license is not required.  While there’s no legal prohibition that would stop an insurance company from investing in equity ETFs, doing so would cause the annuity to become a “security” and therefore subject to FINRA licensing. 

Onward and Upward,

Bruce