• 7-Minute Article
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  • May 02, 2018

A Guide to Investment Options within a Variable Annuity

Creating a diversified portfolio plays an important role in growing potential future income.

A retiree getting advised on retirement income featured in an article about investment options within variable annuity

Variable annuities can play a unique role in developing a diversified savings strategy that supplements other retirement investments. They’re one-part insurance, delivering guaranteed lifetime income when an optional living benefit rider is added. And they're one-part accumulation potential - portion of the owner’s purchase payments are allocated to a mix of diversified investments that can provide long-term growth to help maximize future retirement income.

Variable annuity owners can typically select from a large number of investment options, which creates opportunities to develop a diversified portfolio appropriate for their individual goals. Assembling the right mix starts with understanding the differences among investment types, their performance, and their potential role in an investment strategy.

Here’s a closer look at three major asset classes typically included in a variable annuity’s investment mix, with a breakdown of sub-asset classes and other categories within each one.

Domestic International Growth Value
Large-cap Mid-cap Small-cap Developed markets Emerging markets
Fixed Income
Domestic Global
Investment grade High yield Non-US governments Non-US corporations
Real estate Commodities


Equities, also known as stocks, represent partial ownership in a company. A stock’s price tends to rise and fall along with factors such as the perceived value of the company’s assets and earnings, as well as the strength of the economy.

Investment characteristics Typical role in a portfolio
High growth potential, but potential for sharp changes in value Long-term savings growth

Equities feature several sub-asset classes, based on characteristics such as a company’s size and geographic location or investment style.

Company Size


  • These are mature, well-established businesses (often called “blue chip” stocks). Large-cap stocks represent the top 70% of the equity market’s total market capitalization. (Market capitalization, or market cap, is the total dollar value of all outstanding company shares.)
  • Although share prices can fluctuate, large-cap stocks are considered less risky than other equities because the companies tend to have more resources to weather economic downturns.


  • The category includes companies in the next-largest 20% of the market’s total market capitalization after large-cap stocks. Mid-cap companies are more likely to be regional brands as opposed to national or international businesses.
  • Mid-caps typically offer higher growth potential than large-cap stocks, but with more volatility. Their smaller size makes them more susceptible to economic swings.


  • Small-cap companies fall in the smallest 10% of the equity market’s total market capitalization. They tend to be newer firms with less-developed product lines or limited market reach.
  • Small-caps offer the highest growth potential among U.S. stocks, but with higher risk due to factors such as management teams that have not weathered multiple economic cycles and limited financial resources.


International developed markets

  • Developed markets stocks include companies based in countries outside the U.S. with established, industrialized economies and efficient capital markets. They include Japan and European nations such as the U.K., Germany, and France.
  • These stocks can perform differently than U.S. stocks due to geopolitical factors, monetary policies, or country-specific factors.

Emerging markets

  • Emerging markets stocks include companies based in countries with developing economies, such as China, Russia, and Brazil. These markets typically experience higher economic growth than developed countries and are characterized by industrialization and a growing middle class.
  • These stocks may offer greater growth potential, along with greater risks such as political and economic instability and currency fluctuations.

Investment Style


  • These are stocks that investors believe will offer above-average earnings growth, and therefore, they are typically more expensive relative to the company’s current sales or profits.
  • Growth stocks can be found in many sectors of the market, but are common in industries that are characterized by continual innovation, such as technology or biotechnology.


  • Value stocks are those that appear to be undervalued by the market relative to the company’s current sales, profits, or value of its assets.
  • They are typically found in more mature industries, representing companies that may be more well-established, have higher fixed-costs, and are growing more slowly.

Fixed Income

Fixed-income investments, also known as bonds, represent a loan made to a company or government entity. In return, bondholders receive regular payments based on a fixed interest rate (known as a coupon) over a specific period — anywhere from a few months to 30 years. After that period, the company or government pays back the bond’s full value. Bond values can fluctuate based on factors such as interest rate changes and the risk that the company or government may not repay its debts.

Investment characteristics Typical role in a portfolio
Returns based largely on income payments, meaning lower likelihood of sharp changes in value Income payments and capital preservation

The fixed-income universe includes several sub-asset classes, each with their own characteristics and risks:

Emerging markets

  • Investment-grade bonds are issued by entities with a lower risk of defaulting on debts, such as the U.S. government and corporations on sound financial footing.
  • These stocks may offer greater growth potential, along with greater risks such as political and economic instability and currency fluctuations.

Investment-grade bonds

  • These are stocks that investors believe will offer above-average earnings growth, and therefore, they are typically more expensive relative to the company’s current sales or profits.
  • Considered among the safest fixed-income investments, these bonds offer regular income payments and stable prices relative to equities, but offer lower interest rates and coupons than other types of bonds.

High-yield bonds

  • These bonds (also known as junk bonds) are issued by companies that represent a higher risk of being unable to pay their debts, according to independent credit rating agencies.
  • Bond issuers tend to offer higher interest rates and coupons to offset their higher default risks.

Global bonds

  • Global bonds are issued by international governments and corporations not based in the U.S.
  • Global bonds can offer different yields and prices than U.S. bonds, depending on local interest rates and economic conditions.


"Alternatives" is an umbrella term for investments that fall outside the three conventional asset classes of stocks, bonds, and cash. Alternatives can include tangible assets, such as real estate and commodities, as well as investment vehicles such as hedge funds.

Investment characteristics Typical role in a portfolio
Different return patterns than conventional asset classes Growth of savings and diversification

Consider the following common types of alternative investments:

Real estate

  • Real estate investments include ownership of physical property, such as office buildings or residential properties, or shares in a real estate investment trust (REIT), which is a company that owns multiple properties.
  • Real estate investments may provide income from property rental fees, as well as capital appreciation through the increase in property value or REIT share price.


  • Commodities are basic agricultural or mining products such as oil, corn, soybeans, and copper. Investors buy and sell them through contracts, rather than holding actual copper or corn.
  • Commodity prices are often driven by unique economic or market factors such as inflation, and frequently move up or down in relatively low correlation with stocks or bonds.

Assembling diversified portfolios

Whether inside a variable annuity or another accumulation-focused investment vehicle, choosing a diversified mix of investments from among these asset classes and sub-asset classes can help create growth potential while managing risks. One reason that diversification helps manage investment risk is the fact that different asset classes do not perform in sync with each other — a characteristic measured by correlation.

By holding assets with low correlation to each other in a portfolio, positive returns from other investments may help buffer the impact of a sharp downturn in a single investment or asset class. For instance, stocks have historically posted high long-term average returns, but their prices can decline sharply over short periods. During times when stocks have performed poorly, however, bonds traditionally have provided more stable returns. Adding diversified alternative investments can provide even greater diversification, because alternative returns may have relatively low correlation with stock and bond returns.

Diversification within asset classes

Holding a mix of different types of stocks and bonds can enhance the benefits of diversification. A portfolio might hold stocks in different size categories to create a blend of risk and potential return. A few key points to consider are:

  • Equity investments might be spread across the styles of growth and value
  • Fixed income may include a mix of investment-grade and high-yield bonds
  • international investments may include a mix of US and foreign investments

Ultimately, the right mix of diversified investments in a variable annuity portfolio will depend on each person’s goals and risk tolerance. But because a variable annuity’s investment options are a primary driver of potential growth and future income, understanding the characteristics of different asset classes can help strengthen a retirement plan. To learn more about the benefits of diversification in a retirement plan, read “How to Make the Most of Diversification.


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A Guide to Investment Options within a Variable Annuity

Creating a diversified portfolio plays an important role in your investment strategy. Here’s a deeper look at major asset classes within a variable annuity.