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“Collar Strategy” For Your Variable Annuity


Sophisticated investors sometimes use “collar” strategies to protect their investments. When someone has a collar around a stock, for instance, he or she obtains the right to sell it at a certain price (by buying a “protective put”) and gives someone else the right to buy it at a certain price (by selling a “covered call”). The investor is protected against loss and, until the stock price rises, earns revenue from the call.

A relatively new variable annuity from AXA-Equitable was described to me as employing a collar strategy. The product, which resembles a fixed indexed annuity more than a variable annuity, is called Structured Capital Strategies ADV. It’s not widely distributed right now, but if successful it could lead to similar products from other insurers.

When you buy an SCS contract, you invest your money for one, three or five years in an account whose performance is linked to the performance of either the S&P 500 Price Return Index, the Russell 2000 Price Return Index, the MSC EAFE Price Return Index, a gold price index, an oil price index, or some blend of those.

What makes it a “collar” strategy? SCS limits the amount you can lose while capping the amount you can gain. For instance, if you bought a one-year contract and selected the S&P 500 Price Index as your investment option, you could gain up to 10% over the year (but no more) if the index went up. At the same time, you would be protected against up to 10% in losses during the year. If the S&P 500 Price Index lost 8%, your account would lose nothing. If the index lost 14%, you would lose the difference between 10% and 14%, or 4%.

Bullish investors probably won’t like the 10% ceiling on gains. And bearish investors might object that there’s no clear floor to their possible losses. But this product isn’t for pure bulls or pure bears. It’s intended to give risk-averse people an alternative to staying “on the sidelines” and not investing at all.

Written by Kerry Pechter

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