3 Multifactor ETFs Launch

July 24, 2019

Editor's note: This article has been updated to clarify the ranking system.

On Wednesday, July 24, Principal Financial Group launched three new multifactor ETFs, bringing its total suite of multifactor ETFs to six. The funds, which follow Nasdaq-licensed indexes, will trade on the Nasdaq exchange.

The new ETFs complement the firm's existing mega-cap and small-cap multifactor funds, the $1.6 billion Principal U.S. MegaCap Multi-Factor Index ETF (USMC) and the $353 million Principal U.S. Small-Cap Multi-Factor Index ETF (PSC). Additionally, they will be constructed using a similar methodology to PSC.

The three ETFs are:

  • The Principal International Multi-Factor Core Index ETF (PDEV)
  • Principal U.S. Large-Cap Multi-Factor Core Index ETF (PLC)
  • Principal U.S. Small-MidCap Multi-Factor Core Index ETF (PSM)

Ranking By Growth, Yield & Momentum

All three ETFs use the same basic process: A quantitative model is applied to some parent index to suss out stocks that show potential for high growth, sustainable shareholder value and strong momentum.

The ETF's benchmark culls the top 50% of securities by market cap from the parent index, or the top 50% by rank (33% for PLC and 20% for PSM). Stocks are ranked by three factors:

  • Shareholder yield (or Value, for PSM), which ranks companies based on the financial impact from the return of free cash flow via cash dividends, stock repurchases and debt reduction 
  • Pricing power (or Quality, for PSM), which ranks stocks based on consistent sales growth, earnings quality and growth, and profitability, while also considering price volatility
  • Momentum, which ranks securities by price momentum over multiple time periods

The index then uses modified market-cap weighting, giving more portfolio weight to higher-ranked stocks.

Benchmarks are rebalanced semiannually, and securities that become ineligible for inclusion before that time are removed from the index and are not replaced.

Behind The 3 New ETFs

PDEV tracks a benchmark of international large and midcap stocks, excluding the U.S. and Korea. As of March 31, the index held 634 components. The ETF will cost 0.25%.

Meanwhile, PLC will track domestic large cap companies. As of March 31, the 170 securities in the index ranged between $6.4 billion and $851 billion in market capitalization. PLC will cost 0.15%.

Finally, PSM will track small to medium cap U.S. stocks. As of March 31, the 603 companies in the index ranged from $50 million to $12.5 billion in market capitalization.

PSM's index construction methodology sports a few unique tweaks: Its benchmark is constructed using an industry-neutral approach. Furthermore, securities are weighted not by ranking but by their liquidity-volatility score, to give higher weight to those companies that are more liquid and less volatile. 

PSM will cost 0.20%.

Contact Lara Crigger at [email protected]

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