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.