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Exchange-Traded Funds (ETF)

Last Updated 1/7/19

Issue: Exchange-traded funds, commonly referred to as ETFs, are an investment product that insurance companies can buy that combines the investment characteristics of a mutual fund with the trading characteristics of stock shares. Many ETFs are designed to track specific benchmarks or follow a specific strategy investing in the permitted securities.

Overview: ETFs allow investors to invest in a variety of securities types, markets, strategies and various combinations. Investors can buy ETFs that reflect a broad exposure to the bond or stock markets; U.S., E.U., or Emerging markets; or very specific industries or market sectors. ETFs shares can be purchased and sold on an exchange at a price negotiated by the market much like other investments.

Exchange-traded funds can only operate under an Exemptive Order issued by the Securities and Exchange Commission (SEC) authorizing the ETF to operate and granting exemptions from the Investment Company Act of 1940 provision and applicable rules. Most ETFs are open-end management companies. The ETF's portfolio can be passively managed based on a market index or actively managed based upon a defined strategy. For ETFs following an index approach, the portfolio is compiled on the basis of criteria specific to the index. The index-based ETFs may replicate the index, meaning the ETF invests in the component securities of the index in about the same proportions as exists in the index.

Investors typically buy ETF shares through the exchange on which it is listed. Investors can also exit their position by simply selling ETF shares on which it is listed.

The market price of ETF shares trade near the net asset value (NAV) per share of the ETF.  If the ETF share price traded below the fund's NAV per share, investors could purchase ETF shares on the exchange until they had enough shares to make a creation unit, the basic unit used to construct an ETF, and then submit the creation unit to an authorized participant (AP) for redemption into the underlying investment and then sell those securities for a higher price than they paid for the ETF. In this case, ETF share purchases drive the price up closer to NAV. If the share price for the ETF is greater than the NAV per share of the ETF itself, an investor could do the opposite and buy a basket of securities and submit them to an AP in exchange for the more valuable creation unit of ETF shares and then sell the individual ETF shares in the market to realize the profit. In this scenario, increasing the supply of ETF shares in the market drives down the price of the ETF shares to a level closer to the NAV of the ETF share. The natural market forces of supply and demand maintain the equilibrium between the ETF share price and the NAV per share.

Status: Under NAIC statutory accounting principles in the Accounting Practices and Procedures Manual, shares of an ETF are reported as shares of common stock; except for an ETF that holds only bonds (or only preferred stock) and meets other criteria specified in the Purposes and Procedures Manual of the NAIC Investment Analysis Office. If the NAIC Securities Valuation Office (SVO) concludes that an ETF meets the criteria specified in the Manual, it can place the name of the ETF on the List of Exchange Traded Funds Eligible for Reporting as a Schedule D Bond (the "ETF Bond List") or as Schedule D Preferred Stock (the "ETF Preferred-Stock List"). An insurance company that purchases an ETF on the List then reports it to the SVO for the assignment of an official NAIC Designation. ETFs that are not on the List are reported as common stock under the general rule.

The Statutory Accounting Principles (E) Working Group has a current project to review definitions and scope of the investment SSAPs and may provide more detailed guidance for ETF or mutual funds.

Committees Active on This Topic

Additional Resources

A Primer on Exchange-Traded Funds
October 2014, CIPR Newsletter


Media queries should be directed to the NAIC Communications Division at 816-783-8909 or

Robert Carcano
Sr. SVO Counsel

Kevin Driscoll
Sr. Analyst - Credit Rating & Valuation Group

NAIC Center for Insurance Policy and Research (CIPR)

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