Principal Group ‘Not Going To Stop At One ETF’

July 20, 2015

The Principal Financial Group is nationally known for investment management and as a provider of 401(k) retirement plans, mutual funds and insurance. The firm, which has $500 billion in assets under management, launched its first ETF on July 9. And as Paul Kim, managing director, ETF strategy at Principal Global Investors, told, the company is not looking to just a dip a toe in the ETF market; rather, they are planning a broad ETF lineup incorporating active as well as passive structures, and exchange-traded-managed funds (ETMFs). Why is The Principal Group coming into the ETF space?

Paul Kim: I would characterize this as an extension of our existing capabilities; obviously an important growth area for a big global asset management firm. For investors who prefer the ETF vehicle, this provides an access point to The Principal. And for us, we can access an increasingly large set of clients—both institutional and retail—who have a strong preference for the ETF vehicle. Your first ETF you launched this month, the Principal Edge Active Income ETF (YLD), is an active fund. Are you concentrating in the active space?

Kim: We've filed for index ETF relief. We've also filed recently for ETMF redemptive relief. Our exchange-traded fund strategy will encompass at least two of those—both active and passive. And to the extent that ETMFs get traction, we will certainly evaluate opportunities to offer strategies where daily disclosure is a significant concern.

The ETMF is more for long-term flexibility. But as far as the active and passive ETF structures—the more traditional ETFs—we will have more to come beyond our first active ETF. We're not going to stop at one ETF. And how are you planning to win market share?

Kim: We're going to leverage our existing sales teams. I think of it as getting broader and broader across our sales channels. In the beginning, we're going to focus on RIAs and eventually make our way to the national accounts over time, as we get approvals on various platforms. And then at the same time, we're going to target institutional investors with ETFs when it makes sense.

We’ll leverage our existing sales abilities and capabilities, and over time, the organization will learn the nuances of the ETF vehicle and be able to offer ETF strategies alongside our existing strategies and different vehicles. You were an ETF product manager at PIMCO before coming to The Principal this year. PIMCO’s known as having some of the most famous active managers in the world. What are some of the lessons you learned there?

Kim: The lessons I've learned are: If an active ETF can add value relative to passive alternatives, there's an appetite for that. Active ETFs can get traction. But the value proposition has to be clear.

That may be after-fee performance; it may be a history of outperformance; it may be thought leadership or client servicing beyond what existing strategies offer. Ultimately, if you add value, whether you’re a passive or an active ETF, there’s the possibility to raise assets and compete.

Another way to assess value may be portfolio performance differences, such as differences in correlations, diversification benefits. We think there are a lot of ways that a firm can provide value beyond competing on price.

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