Hybrid indexes to moderate market swings for indexed annuities were all the rage a few years ago, but have since plunged in popularity.By Cyril Tuohy|March 9, 2026

Indexes designed to dampen the ups and downs of stock markets appear to be losing their sheen following interest rate increases, poor investment returns and plaintiffs calling out dismal performance in legal filings.

In the third quarter of 2021, sales allocated to bespoke “hybrid” indexes, or indexes engineered to control for market volatility, reached an apex when 60% of $17.3 billion in fixed-indexed annuity sales was allocated to such indexes, according to Wink’s Sales & Market report. (See chart below.)

But that allocation has dwindled to 26% of the $32.4 billion in FIAs sold in the third quarter of last year, Wink reported.

One reason, according to Wink CEO Sheryl Moore, is that when markets are going up, avoiding volatility can feel a lot more like missing out on upside.

Wink CEO Sheryl Moore

“I mean, a ton of these annuity purchasers earned 0% on their hybrid indexes, while the market was up nearly 25%,” said Moore. “That’s a hard pill to swallow.”

About 200 hybrid indexes are available with fixed-indexed annuities, according to Wink. Fewer volatility control indexes are also available with registered index-linked annuities and indexed universal life products.

The Nasdaq-100 Volatility Control 5% Index delivered a three-year return of 4.2%, as of the end of January, according to the National Association for Fixed Annuities. Other indexes like the Avantis Barclays Volatility Control Index fared little better, advancing 3.1% over the period. By comparison, the S&P 500 was up 70.2% over the three-year period ending Jan. 31.

Advisors and independent marketing organizations “are disillusioned after poor performance in many of the engineered indexes that were created from 2015-2021,” said Bobby Samuelson, CEO of Life Innovators, referring to an era of exceptionally low interest rates. “Rising rates since 2022 have pushed up S&P 500 caps, so advisors have just rotated back to those.”

The Perils of StabilityVolatility-control indexes protect both consumers and carriers from exposure to market swings in ways that can make them more attractive than standard benchmarks under the right circumstances.

Carriers use market indexes to determine the growth of cash values within index-linked annuity and universal life contracts, but they also control that growth through caps that limit index-linked gains and participation rates that credit a percentage of index performance.

Because volatility-control indexes fluctuate less than conventional benchmarks like the S&P 500, such hybrid indexes let insurers hedge more efficiently, thereby reducing hedging costs and boosting their products’ profitability. With less volatility to hedge, the carriers can offer higher upside potential with hybrid index-linked products through more generous participation rates and caps.

In times of low interest rates, carriers generally also keep caps low, so the relatively more generous caps and participation rates associated with hybrid indexes can make them look more attractive. So, when interest rates were slashed to near zero in response to the Covid pandemic, the appeal of hybrid index strategies surged.

As interest rates go up, however, caps and participation rates tend to follow, and the combination of higher cap rates and a rising stock market allow products linked to standard benchmarks to capture more upside than those linked to hybrid indexes with a more constricted band of highs and lows.

The start of the Federal Reserve’s rate hikes in March 2022 — which also coincided with a relatively steady rise in the S&P 500 — tracks with the steep decline in hybrid-index allocations.

Chuck DiVencenzo, president of the National Association for Fixed Annuities, cited the end of the era of historically low interest rates as an inflection point for hybrid indexes.

“Remember, in those years, we had S&P caps in the low single digits,” he said. “With the rise in interest rates, the story flipped.”

Higher cap and participation rates on benchmark indexes became available, while the increase in borrowing rates meant deductions from volatility-control indexes, he said.

Overpromising and Underperforming. Charlie Gipple, founder of the IMO CG Financial Group, said he prefers the plain vanilla S&P 500, and said agents may be shunning engineered indexes because they haven’t been performing up to expectations.

Hybrid indexes were an easier sell back when interest rates kept caps for S&P 500-linked strategies as low as 4%, Gipple said, and agents could illustrate much higher caps and participation rates for volatility-control indexes. But often their constrained performance failed to reach those lofty caps, leaving clients disappointed.

Charlie Gipple, founder of CG Financial

“It has been a bit of a marketing shell game,” Gipple said in an email. “Many agents assumed that high caps and high participation rates meant great performance.”

But volatility-control indexes are specifically designed to hold relatively steady, rather than deliver high growth, regardless of how generous the crediting strategy might be. Low upside potential and low volatility are what make the call options on these indexes cheap, which leads to high caps and par rates, according to Gipple. “Big 200% participation rates and ‘no caps’ is just marketing sizzle when the underlying index is something that has very little volatility,” Gipple said.

“To exaggerate, if you have an index that never goes up or down over time, a high participation rate and high cap sounds good, but it will not perform,” Gipple added. “That is what happened.”

The problem of overly optimistic illustrated performance is a common issue with engineered indexes, which are often constructed with an eye toward showing high historical performance over periods when they didn’t even exist. Such “backcasted” methodologies led to illustrations suggesting future performance that in actuality was unrealistic. The result has been disappointed clients, lawsuits and regulatory scrutiny — as well as gun-shy agents.

Andy Panko, founder and owner of a retirement planning and investment firm, said that of the handful of engineered indexes he’s perused over the last few years, few seem to be delivering much in terms of an investment return and most aren’t performing as well as their backcasted models have predicted.

“That’s kind of been my fear and suspicion with them,” he said in an email. “I suspect others who haven’t gotten drunk on the Kool Aid about those indices have the same fears and suspicions.”