What Withdrawals Reveal about Risk-Control Index Design when Indices Are Cut

– Carriers sometimes withdraw an index from further investment due to capacity issues.
– Capacity refers to the assets under management (AUM) beyond which a strategy cannot achieve its stated return objectives.
– Hedge providers replicate the performance of the indices and hedge the options they have sold to the carrier.
– Hedging activity can have a material effect on the price of a component of an index.
– Capacity is estimated by the hedge provider at the time they start selling options to the carrier.
– Successful sales of fixed index annuities (FIAs) can lead to capacity issues.
– Changing market conditions can also impact the capacity of risk-control indices.
– The iShares Global Clean Energy ETF is an example of an index capacity issue.
– Index capacity depends on the liquidity of the underlying instruments and the design of the index.
– Carriers need to carefully consider index design when selecting risk-control indices to avoid capacity issues in the future.