Iowa-headquartered Principal Financial has expanded its range of multi-factor smart beta funds with the launch of three new equity ETFs.
The funds complement Principal’s existing line-up of multi-factor funds which provide exposure to the US mega-cap and small-cap segments.
The funds provide exposure to value, quality growth, and momentum factors from universes of US large-caps, US small- and mid-caps, and international developed stocks.
The funds are designed to serve as the foundation of an investor’s portfolio, complementing alpha-generating, high active share strategies.
They are the Principal US Large-Cap Multi-Factor Core Index ETF (PLC US), which comes with an expense ratio of 0.15%; the Principal US Small-MidCap Multi-Factor Core Index ETF (PSM US), expense ratio 0.20%; and the Principal International Multi-Factor Core Index ETF (PDEV US), expense ratio 0.25%.
“We are excited with the growth and direction of our ETF platform,” said Paul Kim, Managing Director, ETF Strategy at Principal Global Investors.
“These ETFs provide additional choices for our investors when building portfolios. The factor ETFs are index-aware and provide a balance of potential outperformance and limited tracking error to established market-cap weighted benchmarks. They are cost-efficient, comprised of multiple factors, and designed for use as core holdings in portfolios.”
US large-cap
The Principal US Large-Cap Multi-Factor Core Index ETF is linked to the Nasdaq US Large Cap Select Leaders Core Index. The index uses a quantitative model to assess the constituents of the parent Nasdaq US Large Cap Index universe. Each stock is assigned a composite factor score based on its exposure to the three factors.
The parent index is then ranked by market capitalization with the stocks ranking in the top 50% being selected for index inclusion. Stocks in the bottom 50% are then ranked by their composite factor scores. The methodology selects the top third of stocks within this bottom half while accounting for industry neutrality (each industry maintains a similar weight as the parent index).
The stocks are then combined and weighted by modified market cap with the weight of stocks that have higher composite factor scores being adjusted upwards.
International
The Principal International Multi-Factor Core Index ETF tracks the Nasdaq Developed Select Leaders Core Index which selects its constituents from the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap Index universe.
The engine behind this index is similar to the US large-cap index. It also selects the stocks that make up the top 50% by market capitalization. The methodology differs slightly when dealing with the lower half of the parent index. The methodology also ranks this subset by composite factor score but then selects the highest-ranking 50% while accounting for currency neutrality (each currency maintains a similar weight as the parent index).
All selected securities are then weighted by modified market cap, similar to the US large-cap index
US small and mid-cap
The Principal US Small-MidCap Multi-Factor Core Index ETF tracks the Nasdaq US Small Mid Cap Select Leaders Core Index which is based on the parent indices – the Nasdaq US Small Cap Index and Nasdaq US Mid Cap Index. The index methodology also has its own unique attributes.
The parent index is first ranked according to the composite factor scores of its constituents. The methodology selects the highest-ranked quintile of stocks while accounting for sector neutrality. Out of this selection pool, any stock that ranks in the bottom 10% by liquidity relative to the whole parent universe is excluded. Additionally, previous constituent members will only be removed if their composite factor scores have fallen into the bottom half of the entire parent universe.
Constituents are weighted by their “liquidity-volatility” scores in an effort to make the index more liquid and less volatile.
Each of the three indices underlying the funds is reconstituted and rebalanced on a semi-annual basis.
The funds complement Principal’s existing stable of multi-factor ETFs which includes the $1.5 billion Principal US Mega-Cap Multi-Factor Index ETF (USMC US) and the $350 million Principal US Small-Cap Multi-Factor Index ETF (PSC US), which have expense ratios of 0.12% and 0.38%, respectively.