Annuity Sales Consultant
Volatility control indices (VCIs) have become a core component of many modern fixed indexed annuities (FIAs). Designed to manage market risk and optimize crediting potential, these custom-built indices offer more stable, predictable performance than traditional benchmarks like the S&P 500. Here’s how they work and why they’re gaining traction in retirement planning.
What Is a Volatility Control Index?
A volatility control index is a proprietary market index built to maintain a target volatility level, often around 5%. It does this by dynamically adjusting its exposure to risky assets (like equities) and safer assets (like bonds or cash).
- When markets are calm: The index increases exposure to equities to capture growth.
- When markets are volatile: The index shifts more into bonds or cash to reduce risk.
This mechanism helps create smoother performance over time, which is ideal for the annual crediting methods used in FIAs.
Example: S&P 500 Dynamic Intraday TCA Index
One widely used example is the S&P 500 Dynamic Intraday TCA Index. This index tracks the performance of the S&P 500 but includes an intraday volatility control overlay. It adjusts exposure in real time based on market conditions up to 13 times a day if needed to maintain a 15% target volatility.
This allows insurance carriers to offer competitive caps or participation rates while managing risk exposure more effectively than traditional end-of-day models. The index may also include a cash or short-term Treasury allocation to smooth out returns during volatile periods.
Why Use a Volatility Control Index in an FIA?
Traditional market indices can swing widely in value making it harder for insurance companies to hedge and price upside participation. Volatility control helps:
- Reduce hedging costs, allowing insurers to offer higher caps or participation rates.
- Stabilize returns, making it more likely the policyholder earns interest in volatile markets.
- Offer tailored diversification, as many VCIs include a mix of global equities, fixed income, commodities, or even alternative assets.
Key Features to Know
- Target Volatility: Usually 4%–6% annualized.
- Daily or Intraday Rebalancing: The index may adjust asset weights frequently to stay on target.
- Excess Return Versions: Many VCIs use a “deducted rate” (e.g., subtracting a risk-free rate) to simplify hedging, which can affect how returns are credited.
The Bottom Line
Volatility control indices bring innovation to fixed indexed annuities by offering a more stable, efficient growth engine for policyholders. While they may not capture the full upside of a booming stock market, they can provide smoother, more consistent gains, especially valuable for long-term, retirement-focused strategies. As always, it’s important for consumers and advisors to understand how each index works, what it tracks, and the tradeoffs involved in return potential versus stability.