This newsletter should motivate readers to think more critically about VCIs and hopefully to learn more about options pricing, hedging strategies, and which VCIs are designed to actually perform well. We are thinking of putting on a 2-hour VCI/Hedging Strategies Bootcamp. If we get enough interest, we’ll put on that bootcamp in the next 30 days. If you are interested, click on the following link to let us know.
Stop Overselling the Returns of Volatility Control Indexes (VCI)
For the last several years, VCIs have been a tool to help insurance companies sell FIAs (Fixed Indexed Annuities) to advisors, and advisors to consumers.
Why? Because insurance companies come up with new VCIs that have back-tests that look AWESOME.
https://advisorshare.com/vci-hedging-bootcamp-survey
What’s the problem with that?
Almost NO VCI has lived up to its “back-tested” hypothetical/illustrated returns, and advisors need to stop over illustrating FIA returns with VCIs. That will only happen when advisors understand two things:
1) VCIs will never come close to generating the returns of the index they are mimicking.
2) Back-tested VCI returns have been much less than the actual returns provided.
Invesco QQQ VCI vs. Invesco QQQ (the actual index)
For this comparison, I’m going to assume a 16% annual pt-to-pt cap on the VCI.
20-year historical returns of the VCI (ending 09-25-2025): 9.94%
20-year actual return of the QQQ index: 15.52%
So what? What’s wrong with a 9.94% return in an FIA that has NO risk of loss and locks in the gains every year? Nothing really, except I believe the hypothetical numbers are from a fantasy world.
Let’s look at the returns for the last 12 months ending 09-25-2025.
VCI: -2.94% (zero in the FIA because there can be no negative returns)
QQQ index: 22.83%
Don’t believe me? Here are the index starting and ending values:
VCI starting value = 7688; ending value = 7462
QQQ starting value = 485; ending value = 595
VCIs are NEVER going to Mirror Returns from the Underlying Index
Understanding VCI design—Far too often, advisors learn about a QQQ-based VCI from an annuity marketer at some IMO, and what the marketer FAILS to tell the advisor is that the VCI is made up of multiple components (meaning it will NEVER return what the actual index returns).
The Invesco QQQ index is made up of the QQQ ETF AND two US Treasury Bonds’futures trackers (the 10- and 2-year treasuries).
What’s crazy is that the treasury yields were flat from 09-25-24 to 09-25-25.
So, the only way to get a -2.94% return in the VCI index was to have it move to the QQQ ETF right before the big downturn in February of 2024 (which appears to have been what happened).
This is the problem with VCIs when they NOT 100% in the index (vs. toggling to bond/treasuries).
Are there ANY good VCIs in the Marketplace?
This is a good question. My answer is that there are not many. However, there is one I like that tries to peg the S&P 500 and DOES NOT toggle between the index (it actually uses S&P 500 E-Mini futures and trades up to 13 times a day) and fixed instruments like U.S. Treasuries.
What was the return of this index from 09-25-2024 to 09-24-2025? 6%
What was the S&P 500 return for the same time frame? 15.3%
Would the client have been better in a 10% annual pt-to-pt cap? Yep!
However, I believe this index in a low volatility environment could generate much higher returns than an annual pt-to-pt cap product.
Caps and Participation Rates
How can you tell if they are priced right?
Let’s also not ignore the elephant in the room, which is the fact that carriers can change their caps and PAR rates on the indexes.
Tip to determine if a product is priced right: Look at the carrier’s S&P 500 cap rate. It will tell you a lot about how the carrier prices caps/PAR rates.
If the carrier has low S&P 500 par rates but very high rates for VCIs, WATCH OUT!
The carrier is telling you that they are not allocating that much money to their hedging strategies.
Those are typically the carriers that highly market VCIs with much higher caps/PAR rates.
Let’s take Nationwide, for example—their annual pt-to-pt S&P 500 annual cap rate is 8% on their best growth FIA.
What’s a good cap rate today? 10%-10.5%
And that’s with carriers that publish their renewal rates and have a documented history of keeping them high (unlike most carriers).
What do higher rates with good published renewal rates tell us? That such carriers put a lot more money into their hedging strategies.
What does Nationwide (AND FAR TOO MANY IMOs) push? Yep, VCI!
What about Annexus (my absolute least favorite products in the industry)?
As far as I understand things, Annexus doesn’t offer an S&P 500 annual pt-to-pt cap option.
When carriers push VCI strategies without a competitive S&P 500 pt-to-pt cap option, in my opinion, you are nearly guaranteed to have upset clients when the VCIs don’t perform like their back tests.
Bottom Line with VCIs
If you haven’t been burned by poor VCI returns (the market was up 24% and the VCI you recommended was flat or even negative), then you’ve probably not sold an FIA with a VCI.
Education is ALWAYS the KEY! When you rely on IMOs to get your information because you don’t understand product pricing, you are doomed to recommend products and crediting strategies that many times will not only fail your clients, but also put your reputation at risk.
