By Carl Delfeld of Chartwell ETF and ETFfolio
Since we use a core and explore strategy, one point we stress is that your core portfolio needs to be strong and your explore portfolio needs to be flexible and trading oriented.
A number of Chartwell members and clients have been asking me whether an ETF indexed annuity could serve as core portfolio. So I recently went to a two-day advisor seminar in Denver to find out.
It was an eye opener.
There are much better indexed annuities on the market than even just a few years ago. Nice guaranteed returns, flexibility in index choices, ample liquidity and lower fees. This may be a great way to position your core portfolio and still participate in the upside when markets recover. Just because we are going into a recession, doesn't mean your money has to be in one.
But the most important step is to select a strong insurance company. The insurance company backing the annuity that I think is the best on the market is the oldest insurance (and 5th largest) company in the world (it insured Winston Churchill) and is the #1 provider of indexed annuities in the US.
Briefly, here is an illustration demonstrating how the ETF annuity works.
If an investor puts $800,000 in this annuity, they would receive a 10% bonus right up front or an additional $80,000 for a total initial balance of $880,000.
On this $880,000, you would get a guaranteed annual growth rate of 7.2% for the first ten years, so that in a bit over nine years, the balance would double to $1,760,000 if you did not take any money out.
But there is another perhaps better possibility. Your initial balance will also track an ETF like the S&P 500 or Nasdaq and your account balance will grow by capturing some, but not all, of the index's gains. Another neat option is pick multiple ETFs to track such as the Dow (DIA), the S&P 500 (SPY) and Nasdaq (QQQQ).
Here is a another nice feature. Each year, your indexed gains are locked in so you can’t go backwards if markets decline the follopwing year.
At the end of a bit over nine years, your account balance will have the higher of the indexed account balance and the $1,760,000.
In short, you get a nice guaranteed rate plus the chance to capture most of the upside if markets recover.
I think of this ETF annuity as investing in the markets but with a safety net underneath - just in case.
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