Many financial advisors know Principal Financial Group for its retirement plans, insurance products or mutual funds. As for its exchange-traded funds, probably not so much.

The company rolled out its first ETF four years ago, and on Wednesday it launched its 14th fund in a product suite now comprising five actively managed and nine smart beta ETFs. Its newest fund, the Principal Ultra-Short Active Income ETF (USI), is an actively managed fixed-income product that charges a fee of 0.18 percent. In aggregate, Principal’s ETFs have total assets under management of $3.4 billion.

On the smart beta side, the Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC) leads the pack with more than $1.6 billion in assets. The fund debuted in October 2017, and its year-to-date return of 14.5 percent trails the S&P 500 Index by three percentage points while its one-year return of 16 percent tops the S&P 500 by three percentage points. On the active side, the nearly two-year-old Principal Active Global Dividend Income ETF (GDVD) is the largest product in that group with assets of $716 million. It’s up 14.6 percent this year and has risen almost 4 percent on a one-year basis. Those figures beat the fund’s bogey, the MSCI ACWI Ex USA Index, by roughly two and five percentage points during those time frames, respectively.

We recently talked ETFs with Paul Kim, managing director of ETFs for Principal Global Investors, a wholly owned, indirect subsidiary of Principal Financial Group. 

FA: Many active managers won’t bring their strategies to the ETF format until they can do so in a nontransparent way. Your active management funds are fully transparent, so obviously you're not worried about that.

Kim: I think people get really worried because there's an investment of time, money and effort to picking stocks and bonds. One area of concern is free-riding, where someone else sees what you buy and then they free-ride off your investment ideas. Or there's front-running, where you're worried about some market maker who knows you're long in a particular stock and that you need to get out of that position, and then they try to front-run that trade and in doing so you get out at a worse price.

We don't feel that those concerns matter in our strategies because with the free-riding part, for example, we have low turnover. So when you buy for the long term, the more people who pile on to your ideas the better it is. So we welcome that. With the front-running aspect, we’re in asset classes that are very hard to front-run on because those markets are so efficient.

FA: Let’s talk about your smart beta suite, which you folks refer to as strategic beta. How do you look at strategic beta and the nomenclature surrounding it?

Kim: It’s just a label, but I think we all know what it means. It’s in the middle ground between a purely active, full discretion strategy and a rules-based passive strategy. Smart beta is rules based, but it tends to benefit from inputs that a manager or index provider has found value in over time.

And why did these factors work? Something like value works because value means you're getting good bang for your buck and it's often buying stuff that is unwanted and cheap for a reason, and it's usually because there's an almost exaggerated narrative around it. So when things trade very cheap over time they tend to work out. That’s an example of a factor. Then there’s momentum, which is a factor that works because when names have a great narrative and people are buying them they're going to tend to keep buying them and it doesn't stop for a long time.

Active managers have used these factors in their portfolios for a very long time. What smart beta does is it pulls those factors out and offers them in a very pure exposure where you know what you're buying and it strips away the cover of what might not have been obvious before. Technology and the transparency of indices and ETFs now allow investors to invest in these factors and take advantage of these opportunities; unlike in the past where you could only really get them through active managers.

FA: What differentiates your smart beta suite from competitors?

Kim:  I think the Principal suite is differentiated because a lot of suites rely mostly on the academic side, so they rely on similar DNA from similar index providers. So you see a lot of similar products leveraging existing research and capabilities from the major index providers.

From Principal’s perspective, we created our own indices with the partnership of Nasdaq that leverage our practitioners’ perspective as well as academic research. I think the net benefit is that our indices in real-world terms should deliver a better performance than indices that are only academic and ignore certain realities and the market impacts of index construction. And we've been very happy with the performance of our multifactor suite because they're doing what we intended them to do it and they're starting to get tested through bouts of volatility like what we had last year. Ultimately, after-fee performance is the metric that tells people which suite of ETFs to use and I think our factor ETFs will look pretty compelling in that perspective.

FA: Do you find advisors fully understand strategic beta and how to use these products?

Kim: I think it's still an ongoing education process and there are still many advisors who have not used ETFs, but that number is shrinking. Smart beta has been around, or some of these factors have been around—think of your Morningstar style box with growth and value—for a lot longer than others. But I think investors now understand that there's a way to access these factors and that factors matter. I think we're still in the early days of education on factors. There's a whole lot of work that needs to be done on how to use these factors effectively, but once you embrace the opportunity set it actually allows you to create very precise and very diversified portfolios because factors are a better tool for diversification than individual companies or sectors. And factors provide you with precision to see through all your holdings and figure out what the risks are.

FA: How well known do you think Principal is in the ETF space?

Kim: There are a lot of ETF providers, so I think we have a lot of work ahead to raise awareness about our ETF platform. As a brand, I think we are very well known, especially on the 401(k) or insurance side of our business. And so our job is to take the brand equity and the positive aspects of our other businesses and help bring those to the ETF world. It starts with delivering after-fee performance and value for our investors, and I think we're starting that process and we're doing pretty well.