This guide explores the integration of ETFs (Exchange Traded Funds) into life insurance portfolios, emphasizing their benefits like liquidity and diversification. It advises on essential considerations such as investment horizon, fee management, and replication quality of ETFs. Investors are encouraged to align their choices with their risk profiles and to evaluate the performance consistency of ETFs over time. The aim is to help individuals make informed decisions for smarter investments within their life insurance plans.
Investing in ETFs through Life Insurance: A Guide to Making Smart Choices
If you’ve ever considered adding ETFs (Exchange Traded Funds) to your life insurance portfolio but find yourself uncertain about how to select the right ones, you’re in the right place. This guide aims to make the process smoother for you.
ETFs, often referred to as trackers, are investment funds that trade on stock exchanges, essentially functioning as securities. Their primary objective is to mirror the performance of a specific index, whether it rises or falls. By investing in ETFs, you can effectively track the performance of major indices such as the Dow Jones, CAC 40, S&P 500, and Euro Stoxx 500.
The underlying assets of these ETFs can range from money market bonds and stocks (like those in the CAC 40 or S&P 500) to currency exchange rates, industry sectors (such as technology, pharmaceuticals, or energy), and even commodity prices (including gold or bitcoin). This means that you can gain exposure to the CAC 40’s performance without needing to purchase shares from all 40 companies individually.
Benefits of Investing in ETFs Through Life Insurance
Liquidity
One of the standout advantages of investing in ETFs through life insurance is their liquidity. When opting for ETFs through a securities account or a PEA, investors must consider how easily they can sell their assets. However, when you invest through a life insurance policy, the insurer manages the liquidity, allowing you to sell your shares without any hassle whenever you choose.
Fees
However, it’s crucial to be mindful of the fees associated with ETF investments. Additional fees, such as management fees for the ETFs, trading fees, and potential entry and exit fees, can accumulate on top of your life insurance contract’s existing charges. Therefore, it’s vital to thoroughly compare fees before making your ETF selections.
“Investors should aim to minimize fees, as over time, these costs can significantly impact the fund’s performance. The only certainty in investing is the amount of fees, as performance is inherently unpredictable,” advises Olivier Malteste, investment director at Yomoni.
Management Options
While you can opt for self-management by selecting ETFs within unit accounts, many life insurance contracts provide managed management options. This approach has been popularized by fintech companies like Yomoni, WeSave, and Nalo, and is now widely available through other online brokers. By choosing managed management, you entrust a management company with the allocation and trading of your investments.
Key Considerations Before Investing
1 – Identify the Type of ETF and Your Investment Horizon
“We recommend a minimum investment horizon of 7 to 10 years to weather potential market downturns. Money market ETFs are a less risky alternative with a shorter investment horizon,” shares Olivier Malteste. “The crucial aspect is not merely investing in ETFs but rather understanding the underlying asset (money market, bonds, or stocks) to define your investment horizon effectively.”
2 – Diversification of Investments
Life insurance is an excellent vehicle for diversifying investments, which can enhance potential returns. Although most unit accounts (UC) within life insurance contracts do not guarantee capital, they often yield better returns over the medium to long term compared to euro funds. ETFs also provide an opportunity for diversification.
3 – Smoothing Investments and Aligning with Risk Profile
“Unit accounts, and especially stock markets, carry inherent volatility and are not guaranteed,” warns Henri Réau, director of development at Placement-direct.fr. “Investors should consider smoothing their investments through scheduled payments, which helps mitigate the risk of investing all savings at a market peak. Additionally, if opting for managed management, it’s essential to select a management profile that aligns with your risk appetite.”
Insurers typically offer three risk profiles: cautious, balanced, and dynamic, each associated with a score from 1 to 7, indicating the level of risk involved. “If you are categorized as cautious or balanced, having 100% exposure to ETFs may not be prudent,” cautions Henri Réau.
4 – Evaluate the Replication Index
When selecting an ETF, it’s vital to assess the quality of its replication technique. This involves determining whether the ETF accurately tracks its benchmark index over time. You can consider two key metrics: the “tracking difference,” which highlights the performance gap between the ETF and its index, and the “tracking error,” indicating daily performance volatility between the ETF and its benchmark. According to Olivier Malteste, “A greater performance gap suggests higher volatility and lower replication quality.”
The tracking difference should also be evaluated over longer periods, typically one year, and even 3 to 5 years to gauge consistency. “If several ETFs replicate the same index, the tracking difference becomes a valuable criterion,” concludes Henri Réau.
Explore your life insurance options thoroughly to find the best fit for your ETF investments.