What You Need to Know
- Higher rates may make bond indexes less appealing.
- International indexes are hot.
- Inflation and climate change are getting direct and indirect commodity exposure some attention.
The focus on climate and the return of inflation have increased some clients’ interest in gold, oil, grain and other commodities.
That enthusiasm is starting to affect the indexes embedded in fixed indexed annuities and registered index-linked annuities, according to Laurence Black, founder of The Index Standard investment index tracking service.
“We have seen an increase in indices used in the annuity space that are linked to commodities,” Black said in an email.
In addition to appealing to clients who want a hedge against inflation, adding commodity indexes may also appeal to clients who want extra asset diversification, Black said.
What it means: Retail financial professionals who got into the game after 2000 may have only a hazy understanding of what commodities are and how commodity indexes work.
But the baby boomers who are retiring now came of age when inflation, and pork belly futures, were big news. Some retiring boomers may like the idea of having exposure to commodities in their traditional variable annuity value allocations or indexed annuity allocation option menus.
Index performance: The Index Standard analysts are quick to point out that they are giving their best guesses of what returns might be but that no one knows what the future holds.
Traditionally, the S&P 500 and similar indexes have dominated indexed annuity allocation option menus.
Clients have made some use of bond indexes, but higher interest rates have pushed bond index returns down to about 4% to 5% per year.