The evolution of indexed products

The S&P Annual Survey of Assets last year revealed $11 trillion indexed to the S&P 500.  The rapid growth of new indexed products in recent years reflects how these products have transformed the industry, offering the dual advantage of potential market-linked growth and downside protection.

Indexed products, especially indexed universal life insurance and fixed indexed annuities, have evolved significantly. These products give clients the opportunity to earn interest based on the performance of a specific index, while protecting their principal from market losses. This innovation addresses the increasing demand for retirement solutions that offer growth potential and security.

Traditionally, indexed products were linked primarily to well-known benchmarks like the S&P 500. While this index remains popular due to its historical performance and familiarity, the landscape of indexed products has expanded dramatically, offering a variety of options that cater to diverse client needs and risk tolerances.

Basic indexes

S&P 500 Index: The cornerstone of indexed products, it basically represents overall market performance, encompassing 500 of the largest U.S. companies. For clients seeking simplicity and reliable historical data, the S&P 500 is a logical choice.

Dow Jones Industrial Average: Another traditional option, the DJIA includes 30 prominent U.S. companies across various industries. While it provides a snapshot of the market, its narrower focus compared to the S&P 500 might be more suited to clients interested in a more industrial- and blue-chip-
oriented index.

Russell 2000: This index tracks 2,000 small-cap companies, offering higher growth potential but with increased volatility. For clients with a higher risk tolerance and a focus on capitalizing on smaller, emerging companies, the Russell 2000 may be a good fit.

Innovative indexes

Innovation in indexed products has given rise to more sophisticated and exotic indexes, enhancing the appeal of FIAs and IULs by catering to various investment strategies and preferences.

MSCI Emerging Markets Index: This index includes equities from emerging economies, providing exposure to markets with high growth potential. It’s an excellent choice for clients looking to diversify their portfolios internationally while still benefiting from the security features of indexed products.

NASDAQ-100: Focusing on 100 of the largest nonfinancial companies listed on the NASDAQ stock exchange, this index is tech-heavy, appealing to clients bullish on technology and innovation sectors. The NASDAQ-100 offers higher potential returns, aligning with clients seeking growth opportunities in the technology-driven segments of the market.

Global multi-asset indexes: These indexes combine various asset classes, including equities, bonds, commodities and currencies, offering a diversified approach within a single product. This innovation allows clients to benefit from a balanced risk-return profile, catering to those who seek a holistic investment strategy.

Risk control indexes: These indexes dynamically adjust their exposure to different asset classes based on market conditions, aiming to maintain a predefined risk level. They appeal to clients who prioritize risk management and stability, offering a smoother ride through volatile market conditions.

Exotic indexes

The more exotic indexes may be of interest to clients with specific interests or higher risk tolerances.

Volatility control indexes: These indexes aim to mitigate the impact of market volatility by adjusting the allocation between equity and fixed-income components. They are designed to provide steadier returns, making them suitable for clients looking to navigate turbulent markets with confidence.

Thematic indexes: These indexes focus on specific sectors or trends, such as technology, health care, or clean energy. They offer clients the opportunity to invest in areas they believe will outperform in the future. 

ESG indexes: As awareness of sustainable investing grows, environmental, social and governance indexes have become increasingly popular. These indexes focus on companies with strong environmental, social and governance practices. Clients committed to responsible investing will find ESG indexes aligned with their values and financial goals.

Custom hybrid indexes: Some products now allow for customized indexes that blend multiple strategies or sectors, tailored to individual client preferences and risk profiles. These offer a bespoke investment experience.

Innovation in indexed products has significantly broadened the options available to clients. The diversity and sophistication of indexed products provide advisors and their clients with an ever-growing choice of strategic approaches to enhance growth opportunities while safeguarding investments. And there is no end in sight for this explosive trend.