Fixed Indexed Annuity: Volatility Control Index and how it can help you get 100% Participation Rates

Troy Sharpe:  In this video, I’m going to show you how one of the more innovative concepts in the life insurance industry can allow you to have participation rates over 100% plus  no cap whatsoever on your potential growth, along with usually no annual fees and no spread for a lot of these strategies today.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of the Retirement Income Show. These are called  volatility control indices. That’s a fancy way to say the index that you track in your fixed indexed annuity, it allocates typically from  stocks to government bonds, could be corporate bonds, sometimes there’s gold or other assets inside these, but as volatility in the marketplace goes up, the fixed annuity  automatically shifts from tracking more stocks. It starts to track more government bonds, which can protect some of the gains that you’ve made but also designed to really smooth out  your investing experience. This also has an impact on your contract anniversary or your reset date by smoothing out the expected ups and downs to help you lock in  more of your gains. First, we have to understand what is volatility. We hear volatility on the news all the time.

We’ll talk about it in the sense of the markets are going down,  man. Things are really, really volatile, but most of the clients that I’ve spoken to over the years have no idea that volatility is actually tracked. You can track volatility  on a daily basis. This is what’s called the CBOE, the Chicago Board of Options Exchange volatility index. It’s known as the VIX. In the little ticker symbol,  if you just type in VIX, you can get this chart. I’m looking at it over the past two years. This actually tells us in a visual perspective,  what volatility is doing. We see 2019 volatility is really, really, really low. We get here in 2020  when the Coronavirus hits and the markets start going crazy. We see volatility virtually overnight spike up. Since then volatility has  started to come down.

Volatility is still not at the levels it was prior to the Coronavirus, but we do see that we’ve seen a decrease in volatility.  What these volatility control indices do inside the FIA or the fixed indexed annuity, the better-designed ones as volatility spikes,  the index that you’re tracking, because remember with fixed indexed annuities, your money has never actually in the stock market. It’s simply using an index to determine what your  gains are, but your principal’s protected because it’s not in the marketplace.

When the volatility tracks or spikes like this in a volatility control  index, the index will typically shift from tracking stocks automatically to start tracking more government bonds. Now, again, it could be corporate bonds.  It could be an asset like gold. It could be currencies, several different VCIs, or volatility control indices in the marketplace. Life insurance companies have essentially been teaming up with  investment banks to create these indices to allow you inside your FIA to track them.

There’s a multitude of them out there. We track the performance  of all of them in the marketplace. We understand which ones perform well, which ones necessarily are inferior to some of their counterparts. If we see here  volatility, spiking, and then we look at the S&P 500, the same two-year chart we see when volatility was low, as in the previous chart, the stock market was  rising. The stock market typically rises when volatility or the VIX is low.

When the VIX spikes here, when the Coronavirus hits,  that’s the market going down. Those two go opposite directions, or they’re negatively correlated. Now, as volatility has  started to come down over the past several months, we’re recording this in the middle of September, the stock market has  started to rise. Now, if we overlay this with this is IEF, this is the seven to 10-year treasury ETF.

This is government bonds. What we see is over the past two years, we get here to the Coronavirus spike, where the markets, the stocks went down,  volatility went up, well, government bonds went up. The reason why government bonds tend to go up when things get very volatile is because institutional investors  and individual investors, they have what we call a flight to safety. They sell their stocks and they run into what is considered to be the safest asset out there, which is government bonds.

We see government bonds doing really, really well. Now, what the volatility control index can bring inside your fixed indexed annuity  without you having to track whether stocks are doing well, volatility is higher, low, what are bonds doing? Automatically, these VCIs, when volatility spikes,  you start tracking more government bonds in less stocks, and this is designed to preserve your gains.

One of my favorite volatility control indices,  it’s called the S&P MARC 5%. Long story short here, the index is created by Standard and Poor’s. MARC is an acronym. It stands for  multi-asset risk-controlled. 5% is the target volatility level that they’re looking for. All that really means is when volatility spikes,  they’re going to shift in this index to more government bonds.

Now, if we look here year-to-date, this is as of September 16th, 2020, the index is  up 8.09%. We can track this and we can actually earn right now between 110% and about 125%, depending which  life insurance company we go with because all companies offer different rates. These rates are constantly changing until you deposit your money and your policy gets issued.  It’s just a very fluid and dynamic environment in the industry. Year-to-date, 8.09%.

If we look over the past one year, this index,  this VCI has returned about 10%. Over the past three years, it’s averaged a little over six per year. Over the past five, a little over 6.39%  per year. All this index does is allows us to have our money invested somewhere where our principal’s 100% protected because of the FIA.  But in times of volatility, the index can preserve some of our gains by transferring from tracking stock, to tracking government bonds.

That helps  us preserve those gains. When we looked at this in the Coronavirus period here. Let me go year-to-date. We see at the bottom January, March, May,  even though it’s up 8% year-to-date, we don’t see a huge drop here because what this index did when the Coronavirus hit is it shifted to more government bonds.

It’s designed to smooth out your returns. One other cool thing about the volatility control index is, is when we look at  the annual reset period, what this does is we track the index that we’re in from point A to point B. If we’re tracking just the S&P 500,  there is a risk that before your gains lock in, the market could drop significantly. Maybe if you were up 8%, your contract anniversary comes, now,  you’re only up five because the market had a bad day.

Volatility control indices helped to smooth that out. We don’t expect such large drops over a one-day, two-day, three-day  period. You see the returns are typically pretty smooth here. Whether we have a one-year reset or a two-year reset, we can expect a much smoother outcome.  A lot of information covered in this video, but it’s important to understand some of these indices work, what their back-tested results are and because a lot of these indices are new,  they take the formulas that they use to determine which assets they’re switching in and out of.

They apply it retroactively to backtest, to see how they would have performed  in various market environments. Now, there are some limitations and past performance or backtesting isn’t necessarily indicative of what you would see moving forward, but it can give us a  decent idea of what to expect. These are relatively new innovation within fixed index annuity policies. It’s important that we have one  that we have some experience with, and we know or at least we feel confident that will perform up to expectation.

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