Retirement Investor

With the S&P 500 Looking Pricey, Now is the Time for Structured Annuities


There’s a song by the 1980s band Asia called Heat of the Moment, which includes a line etched in the memory of many like me who were coming of age forty years ago. “And now you find yourself in ’82, the disco hot spots hold no charm for you.” This is admittedly a stretch, but will we be saying the same things about the S&P 500 beginning 2022, as in “And now you find yourself in ’22, the S&P 500 holds no charm for you?”

One can see how large cap domestic equities could see their charm erode after years of outperforming almost every other equity class. To put it plainly, look no further than valuations. The S&P 500 forward P/E for the next 12 months projected earnings currently stands at 22.45 (source: P/E & Yields (, well above the long term average. Compare this to the forward P/Es of both developed and emerging markets, which have vastly underperformed the S&P 500 over the last decade. The MSCI EAFE index sports a forward P/E of just 15.4, and the MSCI Emerging Markets index is even lower, at 12.7. (source: MSCI Forward P/Es ( 

Here’s the conundrum. Despite equity performance that has swelled the retirement accounts of many over the last dozen years, many still need more growth in the final years of nest feathering prior to retirement that may only be a few years away. And only equities can provide the scale of growth needed, simply because equities remain the primary growth engine for future retirement income in a world increasingly without pensions. But is that performance likely to come from the same places, or is it time for a pivot?

They say necessity is the mother of invention, and the annuity world has been innovating like never before. The relatively new category of structured annuities – also called buffered annuities or registered index linked annuities (RILAs) was pioneered by AXA with their Structured Capital Strategies product over ten years ago, and the category has continued to evolve rapidly. Today’s products offer an opportunity to remained aggressively invested in equities beyond what might be considered standard risk management practice and create an opportunity to get exposure to both foreign and domestic equity categories in an easy to digest way. 

Overseas and Underwhelming

While past performance is not an indicator of future performance, the fact remains that it matters as it is our only yardstick for comparing performance. The past performance of some major non-US equity indexes is a leading indicator of their attractiveness to investors over the last decade. Whether it is emerging markets or developed foreign markets, that past performance relative to the S&P 500 has been underwhelming to say the least and has likely left many equity investors under allocated to non-US equities.

For example, over the last five and ten years as of October 29, 2021, compare the performance of the S&P 500 total return index to that of the MSCI EAFE index (developed non-US and Canada) and MSCI EM index, all in US dollars. Next to each percentage is the value of a $100,000 investment over that timeframe and performance. (Source:

5 Years

10 Years

S&P 500

18.93% / $237,934

16.21% / $449,195


9.79% / $159,520

7.37% / $203,624


9.39% / $156,635

4.88% / $161,037

The numbers don’t lie. Over the last ten years, sticking within these shores with the benchmark index produced returns far above those produced overseas. Every $100,000 investment in the S&P 500 instead of the MSCI EAFE brought almost an additional quarter million dollars in accumulation. And compared to emerging markets, the difference is even more stark with almost $300,000 MORE accumulation in the S&P 500. Those differences are smaller over the last five years but still remarkable. These performance differences created life altering results for those who eschewed foreign markets in favor of the USA. 

But this is looking in the rearview mirror. What’s important now is, what does the future hold? Do you dance with the one that brought you, and continue heavily weighted to the domestic market, high valuations and all? Or do you take a shot at the overseas markets, with emerging markets sporting a 40% discount to the S&P 500 forward price/earnings ratio, and developed markets (MSCI EAFE) offering a still handsome discount of almost 30%? After all, future returns in the S&P 500 are typically below par when starting from a period of high valuation metrics such as those of today. 

Yet those past performance disparities between the US and overseas remain hard to overlook, as are the typical political and currency risks. Fortunately, the annuity industry has developed an attractive way to get overseas exposure, with some guardrails. The latest structured annuities can provide exposure to the price return performance of these markets, sometimes even more than 100% of that upside, while providing a cushion against losses. In fact, the upside potential can, in some cases, more than compensate for the lack of dividend participation. This is a breakthrough it seems, as now structured annuity products can in some circumstances compete for the same portfolio allocation slices as mutual funds and ETFs, giving up little or no upside potential over a specific timeframe while providing a degree of protection that funds do not.

For example, as  of this writing, one company offers a buffer segment option allowing the owner to participate in 145% of the upside performance of the MSCI EAFE price return index over the two-year point to point crediting period….AND at the same time, the 10% buffer will absorb the first ten percent of losses if the index is down in value at the end of the two-year period. This comes with a charge of 0.95% on an annualized basis.

For example, assume an initial investment of $100,000 to this buffer segment within the contract. If after two years the MSCI EAFE index had climbed a total of 30%, the product would multiply that growth by 45%, adding 13.5% of growth (45% of 30%), for a total of 43.5%. The contract value at that point would be $143,500, less fees.

What if the index instead declined by 8% over the two years? In that case, the contract owner lost nothing, as the contract would absorb the first 10% of losses in that two-year period. And if the MSCI EAFE index plummeted 20% from the date of allocation to that buffer segment option? The owner would see the value of that segment decline by about 12%, since the contract absorbs the first 10% of losses and the fees over that two-year period were almost 2%.

The Math of Break Even: Annuity vs ETF

Now, to be fair, most fixed indexed and structured annuities (also called buffered annuities or registered index linked annuities) only use the price return versions of equity indexes in their crediting methods. So, one might be forgiven for thinking that upside is more limited in structured annuities given the lack of dividend participation, as compared to investing in an exchange traded fund or mutual fund with similar characteristics. However, if the annuity participation rate in that index is more than 100% of the price return over a given period, there is a simple break-even formula to consider. 

For example, currently the MSCI EAFE index has a dividend yield of 2.48% as of 10/29/21 (source: For a two-year period, let’s call that a total of about 5% in dividends that one forgoes if investing in an annuity using this index. In addition, the sample  annuity charges 0.95% per year for any allocations to the buffered segment. 

The question to ask is this: With a participation rate of 145% of the price return version of the MSCI EAFE index over two years, what must the performance of that index be to overcome the lack of a dividend, and the annual charge, and therefore outperform an ETF that invests in the total return version of the MSCI EAFE index, without any charge? (I posit this no charge assumption merely to give the ETF all the benefit of the doubt comparison wise.) 

The formula is simple: Take the expected cumulative dividend percentage over the period (5% over two years in this case), add in the fee for the annuity ( 0.95% on an annualized basis, so call it 1.9% in cost over two years) and divide it by the annuity contract participation in the index that is more than 100%. So, for the product referenced, it would look like this:

Breakeven Formula: 

  1. (Expected Cumulative Dividend% Over Period) + (Cumulative Annuity Charges over Period) Divided by (Participation Rate% Minus 100)
  2. 5% + 1.9%/45% = 15.33%

This means if the MSCI EAFE index price return index performs at a cumulative 15.3% or better over a two-year period, the 145% participation rate will overcome the lack of a dividend and the annual 0.95% fee for the annuity. This means the annuity would outperform the ETF in those circumstances…and 15.3% does not seem a tough bogey to meet over two years. On the flip side, in periods of poor performance, the annuity will outperform the ETF in any two-year period in which the price return is negative 6.9% or worse. 

So, in our example, any price return loss over a two-year period of -6.9% or worse means the total return is -1.9% (because we are adding two years’ worth of dividends, or 5%), and -1.9% is net performance of the annuity any time price returns are between 0 and -10%, all due to the fee. As potential price return performance gets worse over the two-year period, eventually the advantage will remain a flat 8.1% to the annuity – which is the total of the 10% buffer less the 1.9% fee for two years.

The last decade or more has been a phenomenal time to own domestic large cap equities. Now may be the time to look overseas for better opportunities for the next decade. Fortunately, the annuity industry has the solutions to help investors leverage the potential rewards from these markets without the traditional degree of risk.

John Rafferty

John Rafferty has spent much of his 30-year career building annuity marketing departments at MassMutual, AIG/American General, and Symetra. He holds a B.A. in economics from Colby College and an M.A. in public policy from Trinity College, and currently operates an annuity sales and marketing consultancy,

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