Why All The Different Indexes Today?
Gone are the days when every index annuity crediting method was based on the S&P 500—or, at least, the Dow Jones, NASDAQ, or Russell indexes. Back in 2007—before the crash in 2008—nearly every index annuity was sold using a crediting method based on the S&P 500..
So, why did this change? And, is it a good thing?
The crash of 2008 brought about a big change to the way we as a country invest, and even to how our economic markets perform—even still today. Volatility used to be something that was measured on a monthly basis back then. Today, it is measured minute by minute, because ever since the crash in 2008, the markets have been much more volatile and unpredictable. And, unfortunately, the major indexes, like the S&P 500, are hurt the most by these huge and frequent up and down swings (a.k.a. ‘volatility’).
So, the insurance carriers decided to look for different indexes that did not swing up and down so drastically, but still performed well over time—with great interest returns, and consistent performance regardless of economic volatility. This has been a tremendous improvement for annuity investors, because they are receiving gains with more reliability and even greater performance than we could have ever seen if we had stayed with the old standards like the S&P 500.
Are there any drawbacks to using these new indexes? Sure…there can be.
The number one ‘problem’ to overcome is in helping clients understand what these new crediting method indexes are based on. Luckily, many of the best performing crediting methods utilize indexes that are familiar to many Americans.
If you look at the list of top performing crediting methods on page 6, the best performing index is the “NASDAQ FC” or ‘NASDAQ Fast Convergence’. Here is what is behind this crediting method’s index, and why clients warm up to it with only a little explanation…
The NASDAQ FC does not use just the NASDAQ index, but is powered by Bank of America and Merrill Lynch, who created the index. It uses patent pending technology to measure volatility and performance daily, and adapts faster than the actual NASDAQ index alone by rapidly re-positioning assets across 100 different U.S. and International companies listed on the NASDAQ international trading platform. So, if there is a big downturn in the major indexes like the S&P 500, the NASDAQ FC index has already adjusted its risk to the volatility so that the impact is minimized. Conversely, when the markets are performing well, the NASDAQ FC re-positions to take advantage of the economic upturn.
How does all of this help the carriers pass on more interest returns to the annuity policies? I’m glad you asked…
Because the volatility is controlled better with these newer indexes, insurance companies can be more aggressive with their purchases of bonds, options, and other assets they use to drive interest returns. In other words, ‘because there is less risk of loss—because these new indexes control exposure to risk—the carriers can take bigger risks with some of their investment portfolios, and bigger risks return bigger rewards’.
We can help with any questions you or clients may have regarding how all of this works, and even give you materials and talking points that will help make these new and powerful indexes simple to explain and easy to understand.
Just give us a call!
~ Greg Skogsberg