Sales of variable annuity products are down while sales of exchange-traded funds are up. Based on these trends, some insurance companies are eying ETFs as a way to potentially goose the sale of VA products.

Variable annuities, which are sold by insurance companies, are tax-deferred retirement products designed to pay future income payments based on the performance of the underlying investments. Sales of VA products have slowed in recent years for various reasons including insurers exiting the business and the closure of certain share classes, while it’s believed the U.S. Department of Labor’s fiduciary rule governing retirement accounts could also have a negative impact.

As a result, says Cerulli Associates, last year saw outflows of $3.9 billion from unaffiliated subadvisory and variable insurance trust (VIT) subaccounts. In a recent report, the Boston-based financial services research firm explored whether the adoption of ETFs within VAs could bolster growth.

According to a survey it conducted with the Insured Retirement Institute, 54 percent of insurers believe ETFs offer high growth potential in the upcoming three years, while another 31 percent say ETFs offer some growth potential. Meanwhile, 39 percent of subadvisors and VIT managers surveyed believe ETFs have significant potential for subaccount growth.

In its report, Cerulli notes some examples of where the marriage of VAs and ETFs has made progress. It cites the variable insurance trust portfolios from The Optimized Portfolio System (TOPS), an ETF portfolio management program advised by ValMark Advisers Inc. According to ValMark, its VIT portfolios are offered through variable annuities and variable life insurance in more than 15 different insurance platforms.

Cerulli also mentions the partnership between Lincoln Financial Group and BlackRock, which in February announced the launch of an ETF-only variable annuity comprised entirely of iShares ETFs.

Nonetheless, Cerulli says the adoption of ETFs within VA products remains small. Among the reasons: structural differences between mutual funds and ETFs, along with less-than-full client comfort with ETFs. But Cerulli notes that it expects ETFs to gain traction within VAs as product lines become more diverse, and because consumers increasingly are demanding low-cost and transparent products.

In addition, Cerulli says, ETFs can be used as hedging tools, which is key because it says that two-thirds of insurers say they use hedging programs to manage risks associated with guarantees.