Pivot to win it: The importance of commodities in an IUL index strategy

byPatrick Waters

The bull takes a bow

Much to the delight of clients, the S&P returned an average of 15.98% from January 1, 2009, through December 31, 2021. While the sight of these kinds of returns on monthly statements have kept many clients happy, it’s made advisors numb to the harsh reality of losses.

Some advisors are having conversations about loss for the first time in recent memory. One way to mitigate the potential for market downturns is through indexed universal life (IUL). Not all IUL policies and their respective indices are, however, created equal. In this post, we’ll take a look at the impact of being able to allocate to commodities in an IUL index. We’ll also discuss diversification (and lack thereof) within commodities.

During times of strength in equity markets, the returns on the typical volatility-controlled index will usually average between 5% to 8%, depending on the index. That said, the longest bull market in history is finally coming to an end. Now many advisors are forced to roll up their sleeves and find real solutions to help minimize the effects of negative returns and inflation.

Hedging against inflation

Commodities have taken a backseat to growth stocks over the past decade. But given our current economic landscape, advisors should consider taking a close look at commodities—as they may have a positive impact on index returns.

Commodities tend to act as a great hedge against inflation. Think about it. They are the building blocks of products that you and I purchase daily. If you own a commodity, chances are that if the price of the product has gone up, some of that increase can be traced back to the cost of the basic materials that were used to create it. In theory, commodities will perform better in periods of increased inflation.

IUL indices and commodities

There are currently 37 indices available on various IUL contracts. From January 1st, 2022, to April 25, 2022, the average IUL index delivered a raw return of -5.51% (keep in mind that inside an IUL, the return will never be less than 0%). The few indices that have the ability to allocate to commodities outperformed those that do not.

Looking at those indices that can allocate to commodities, we noticed one thing. Many of the indices that are generally classified as having the ability to pivot to commodities are, in fact, only allocating to gold and/or oil. The diversification (or absence of it) has had a noticeable impact on index performance year to date.

While gold and oil are two of the most important indices, they are certainly not the only ones. There are just a handful of indices that can allocate to a broad range of commodities—from gold and oil to wheat, barley and silver. So far this year, the indices that can allocate to a broader range of commodities have outperformed those that are limited to gold and/or oil.

The takeaway

As you know, we’re in uncharted economic territory. When analyzing the current IUL universe, consider indices that are forward-looking and can pivot accordingly. There is one IUL index that has the distinct ability to allocate to a broad range of commodities. As you’d guess, it’s outperforming peers with a 2.74% YTD return as of June 23, 2022. See how it stacks up to other major IUL indices.

See which index is leading the pack

Call us at 866.866.7050 ext. 2 or drop us a message to find out. We’re here to help.

SOURCE: S&P 500 Annual Total Return, https://ycharts.com/indicators/sp_500_total_return_annual

Special shoutout to Sheryl Moore at Wink for intel regarding number of IUL indices available.