ETF Update: Variable Annuities Join the Party; Financial ETF Rebound

Variable Annuities Join the Party

ETFs have become so popular that 401(k) plan providers and variable annuities want to include them. Variable annuities are contracts sold by an insurance company designed to provide payments to the holders at specified intervals, usually after retirement.

Net assets of variable annuities grew to $1.5 trillion in the second quarter, according to the Association for Insured Retirement Solutions. So combining the two popular products should bring lower fees and more transparency than a mutual-fund based variable annuity.

However, many advisers who use ETFs claim that variable annuities have relatively high fees and lack flexibility, even if they are ETF based. Then there's tax issues as well. An ordinary mutual fund or a normal ETF will have returns taxed as capital gains at a 15% rate, but withdrawals from a variable annuity can be taxed up to 35%, reports Darla Mercado for Investment News. This could offset any of the variable annuity's tax-deferral benefits.

Financial ETF Rebound

Despite all the bad news that has surrounded financial ETFs lately, they're continuing to rebound. Recently, NetBank and Miami Valley Bank of Lakeview, Ohio, went out of business. These closures made for a total of three bank failures for 2007, which is a lot considering there were zero bank closures in 2005 or 2006. On top of that, many financial stocks such as Citigroup (C), Merrill Lynch (MER) and Washington Mutual (WM) were down last week.

Yet looking at financial ETFs such as Financial Select Sector (XLF), KBW Capital Markets ETF (KCE) and WisdomTree International Financial (DRF), they're all trending up. Year-to-date, XLF is down 1.5%, KCE is up 3.8% and DRF is up 9.5%.

A few possibilities behind financial ETFs' rise, according to Kevin Baker for TheStreet.com, include:

• Since the dollar and the Canadian loonie are relatively equal now, Canada's Toronto Dominion Bank (TD) bought Commerce Bank (CBH) which might have signaled a financial stock acquisition boom.
• There have been big write-offs at the end of the liquidity crisis.
• The yield curve has turned into a positive slope, which allows banks to pay less for short term deposits while using the funds for long-term loans.
• The Federal Reserve seems likely to cut rates again soon.