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Delivering solid returns in tough economic times

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The decade after the Great Recession brought moderate growth, low inflation — and little drama. From 2010 to 2019, annual gross domestic product growth ranged between 2.71 percent and 2.29 percent, while the annual inflation rate exceeded 3 percent only once.

Today’s environment is different: Market uncertainty and high inflation rates have many preparing for retirement seeking stability, often by choosing an annuity. In 2023, annuity sales reached over $385 billion. That broke the record high of $313 billion in 2022 and the previous high of $265 billion in 2008, when the U.S. was amid the Great Recession.

In 2023, sales of fixed indexed annuities (FIAs) set a record of $95.9 billion as clients looked for a way to help protect principal, guarantee an income stream and lock in gains when stock prices rise.

But how effective can a FIA be at delivering results in a tough market? Drawing on 122 years of historical and back-tested data, research conducted for Athene by The Index Standard® found a FIA tied to custom indices with a volatility control feature can offer advantages in some of the toughest economic conditions.

  • During the Great Depression, drawdowns (the period from a market’s peak to trough to peak again) of a hypothetical benchmark index would have been severe — in the 60 percent to 80 percent range — for 1932-1933, compared to only 20 percent for a hypothetical custom index with a volatility-control feature.
  • During the high inflationary period of the ‘70s and ‘80s, a FIA with a custom index would have provided more stable returns compared with the U.S. 1900 Bond Index. That would have been good news for fixed-income investors, who often see relatively low returns during inflationary periods.
  • And, more recently, when COVID-19 crippled the economy and sent the market tumbling in 2020, custom indices helped cushion the blow, falling 11.5 percent on average, while the S&P 500® plummeted almost 34 percent, demonstrating the value of a feature that actively monitors and adjusts proactively based on market indicators.

Protection during the Great Depression

In the worst of times, custom indices can help provide stability and protection, even during periods of extreme volatility like those seen during the Great Depression.

In addition to limiting drawdowns, another benefit of custom indices during the Depression would have been better returns relative to the risk of investments. Between 1925 and 1935, one of the worst periods for equity markets in history, the Sharpe ratios1 for custom indices with a volatility-control feature in the study were well over 200 percent higher than for the benchmark indices. The higher the Sharpe ratio for an investment, the more favorable it is in terms of risk vs. return.

The inflationary 1970s

The inflation we’re seeing today was a hallmark of the 1970s and early 1980s. In the 1970s, when people wore “Whip Inflation Now” buttons, annual inflation rates hit a peak of 13.30 percent in 1979. Rising interest rates tend to hurt the value of current fixed-income assets such as bonds — as rates rise, the interest payments from the current assets are less competitive, causing a fall in their prices.

But the custom indices in the study would have provided more stable returns during this period than the benchmark ones. And the annuities using a custom index with volatility control? Compared with the study’s bond index, the FIA with a custom index outperformed the bond index through much of the ‘70s. 

For the entire 122 years studied, FIAs with a custom index would have outperformed the bond index about 75 percent of the time, on a 10-year rolling-return basis. The results bear out the idea that fixed indexed annuities using custom indices with a volatility-control mechanism can provide both protection of principal from market loss and the opportunity to benefit from rising stock prices.

Improved returns for the risk taken

Although these custom indices often might provide lower absolute returns compared with benchmark indices that don’t use volatility controls, that doesn’t tell the whole story. The risk-adjusted returns — that is, the return per unit of risk — for custom indices often are higher than for benchmark indices.

Long-term performance of custom indices with a volatility-control feature in the study, which considered data from 1900 to 2022, bore out this conclusion. Also, for the volatility-control equity index in the study, the average volatility was about half that of the ordinary equity index.

These benefits can help owners of FIAs meet their retirement goals while providing stability and an efficient return for the amount of risk taken.

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1 The Sharpe ratio is a widely used method for measuring risk-adjusted relative returns. It looks at the returns offered by a product vs. the risk taken to receive that return.

Since this discusses how custom indexes could/would have performed in the past, it is not an indication on how an index will do in the future.

Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.

Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets

The S&P 500® Index (the “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and has been licensed for use by Athene Annuity and Life Company (“Athene”). S&P®, S&P 500®,  SPX®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Athene’s products are not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.