Solactive remains dominant in Canada, eyes US annuity market

Following its opening of Toronto office in 2018, Solactive has left its mark in the Canadian retail market as the main supplier of underlier assets for structured products.

In 2023, there were 5,102 structured notes issued in Canada, of which 3,320 are linked to 32 Solactive indices, - including the Solactive Canada Bank 40 AR Index, Solactive Canada Utilities 160 AR Index and Solactive Canada Blue Chip AR Index, according to SRP data.

All of these Solactive indices are built with a decrement overlay, which periodically deducts a predefined fee, either in the form of a fixed percentage or index points, from the underlying indices.

Risk management has been the driving force for the use of decrement indices in Canada, which was triggered by a “great reset” during the Covid-19 pandemic. “Perspectives about dividend risk changed drastically,” Bernd Henseler (pictured), managing director, head of Americas at Solactive, told SRP.

The Solactive Canada Bank 40 AR Index and Solactive Canada Utilities 160 AR Index, the most widely featured underliers, are comprised of high-dividend stocks of leading banking and utilities companies in Canada, which tend to make up a large part of domestic investors’ portfolios, according to Henseler.

Outside structured notes, a handful of Solactive indices were deployed via guaranteed investment certificates (GICs).

One challenge is coming up with a ‘technology’ definition that resonates with the investor base – be it general industry classification of tech companies or thematic like artificial intelligence and semiconductor's - Bernd Henseler

In 2023, Solactive continued to forge ahead with its decrement range and is now planning to introduce its first batch of technology indices with the synthetic dividend overlay aimed at Canadian investors, according to Henseler.

The new indices will be targeted at structured notes issuers seeking to develop new autocall and accelerator (geared participation) structures.

“One challenge is coming up with a ‘technology’ definition that resonates with the investor base – be it general industry classification of tech companies or thematic like artificial intelligence and semiconductor's,” said Henseler.

The company launched the Solactive Cyber Security Technology Decrement EUR Index and Solactive Cyber Security 15% Risk Control 4% Decrement Net EUR Index in February 2021 and April 2022, respectively.

They have been used by 10 structured certificates across Italy, Czech Republic and Switzerland, SRP data shows.  

In Canada, Henseler also highlighted the gradual adoption of single stock decrement indices that measure the performance of single stocks after taking into account dividend expectations.

Royal Bank of Canada (RBC) is currently pitching three structured notes linked to the Solactive Bank of Nova Scotia AR Index after it issued the first three with the reference asset in 2023.

“We have also seen an increasing use of specific filters to apply liquidity constraints, such as market volume, daily traded volume on exchanges and market capitalisation,” said Henseler.

An example is the Solactive US Select Infrastructure Index, which went live in January 2022. To enhance hedge capacity and pricing, the index applies minimum average aggregate option liquidity volume and minimum average daily value traded filters. 

“Such additional filters are unique features and [aim to] benefit indices that cover a smaller segment or theme of a market,” said Henseler.

There are 17 autocallable notes linked to the Solactive US Select Infrastructure AR Index issued by Canadian Imperial Bank of Commerce (CIBC) from March 2022 to September 2023, SR data shows.  

The filter for liquidity constraint has also been recently added to some custom indices in Canada, according to Henseler. 

US

The German index provider is making headways in the US market by tapping into annuities, which has seen unprecedented growth driven by fixed index annuities (FIAs) and registered index-linked annuities (Rilas) over the last three years.

At present, Solactive primarily acts as a calculation and verification agent for third-party indices developed by investment banks or asset managers.

The index provider is behind several high-profile underlying indices used in FIAs issued by Athene, Delaware Life and American Life.

“We [also] supply index building blocks for multi-asset custom indices, such as the Solactive 10-Year U.S. Treasury Future Index,” said Henseler, adding that certain markets may also be represented by Solactive indices in an overall index strategy.

In 2023, FIA sales totalled US$95.6 billion, up 20% from the prior year, while Rilas surpassed traditional variable annuity sales for the first time, reaching US$47.4 billion, 15% higher year-on-year, according to Limra’s latest survey results.

“As FIAs and Rilas are increasingly adopted by advisors as part of their toolkit, asset managers are entering the space, such as Pimco as Alliance Bernstein,” said Henseler. “They’re looking to leverage their research know how to formulate an index strategy.”