Variable Annuities vs. ETF Portfolios

Annuities can be complex instruments with a range of fees and conditions that make them hard to understand and need to be studied carefully. Essentially they offer tax deferred growth with a range of income guarantees and life insurance.

One of the key problems is understanding their real earnings potential and getting the best out of them because tracking the funds in the Sub-Accounts is not easy. Nevertheless, it is possible to build an effective portfolio that can compete with an ETF portfolio if done right.

In this first of two articles, we measure historical returns from a number of variable annuity products based on strategic and tactical asset allocation.

In the case of strategic asset allocation, the funds not in fixed income will be split evenly between the other remaining asset classes. We do use styles rotation in each of the asset classes – for example, we may move from LQD to TIP within the fixed income class.

In the case of tactical asset allocation, we use a 12 month rolling average of each fund in the plan and if one or more of the asset classes is underperforming based on this rolling average we shift funds into other asset classes. Note, however, that this is not true for fixed income – the fixed income can be more than its initial target (40% for a moderate profile) but it will never be less.

This graph (click to enlarge) summarizes the results for a moderate profile for a range of different annuity programs.

More details on the individual plans

We also include plan rating for each annuity -- plan rating was discussed in a previous article.

Annuity	TAA 5 Yr Return Annualized	Plan Rating
Western Reserve Life Insurance VUL No Profunds New	11%	69%
Vanguard Variable Annuity	13%	74%
Schwab Select Annuity	15%	85%
MERRILL LYNCH IRA ANNUITY	7%	32%
MassMutual Transitions Select Variable Annuity	7%	37%
John Hancock Venture Vantage Variable Annuities Plan	12%	70%
Hartford Leaders Fundation Edge Series 1 Annuity	10%	42%
Fidelity Personal Retirement Annuity	14%	87%
Charles Schwab Income Choice Variable Annuity	14%	72%
AXA Equitable Accumulator Select Variable Annuity	10%	56%
American Legacy Shareholders Advantage Variable Annuity	15%	68%

The returns and plan ratings for the best of the annuities are in a reasonable range. It is important to note that the returns do not include fees which vary but can be in excess of 2%. This can be tolerated with good returns but will significantly reduce what goes in the investor's pocket.

For those with annuities, it is critical that you have a solid portfolio generating the best possible returns -- note that as the growth is tax deferred, active trading has no consequence.

In the next article, we will compare the best and worst annuities with an ETF portfolio and determine whether a tax deferred investment vehicle has real benefits in the long term.

Disclosure: No Positions