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.