ETF Filing: Principal Plans 5 Funds

A recent filing from Principal outlines the firm’s plans to launch five ETFs covering an interesting range of strategies.

Multifactor Funds

Three of the funds in the filing are multifactor products. They include the following:

• Principal Emerging Markets Multi-Factor Index ETF
• Principal International Multi-Factor Index ETF
• Principal U.S. Mega-Cap Multi-Factor Index ETF

Interestingly, the three Multi-Factor funds don’t have a unified methodology. The developed-market and emerging market ETFs will offer combined exposure to three metrics: shareholder yield, otherwise known as the yield factor; pricing power, otherwise known as the quality growth factor; and momentum.

After screening out the least liquid stocks from the parent indexes, potential components are scored on each of the factors in question, and those with composite scores falling within the top 20% are selected for the fund index. The selected securities are weighted based on a combination of liquidity and volatility.

Meanwhile, the mega-cap fund will track an index derived from the Nasdaq US 500 Large Cap Index. The fund's benchmark first selects the top 50% of the parent index's components based on market capitalization. The top 10% of those stocks will be weighted by market capitalization in the new index and the other selected stocks will be equally weighted, with an additional adjustment to give lower-volatility stocks more weight, according to the prospectus. 

Contrarian Fund

The Principal Contrarian Value Index ETF seeks to identify undervalued components of the Nasdaq US Large Mid Cap Index using a quantitative process. The methodology ranks the potential components by book yield and sorts them into deciles.

In bearish market conditions, the top three deciles are selected for inclusion in the index. However, in normal market conditions, the rankings are adjusted based on leverage, price volatility and forward earnings dispersion calculations with the intention of avoiding “book yield traps,” the prospectus said.

Interestingly, the financials sector is separated out and not included in the general mix when ranking the potential components. The methodology selects the top three deciles from the financials sector separately from the top three deciles of the rest of the market, according to the prospectus.

The top decile is weighted at 50% of the index, while the second and third deciles are weighted at 35% and 15%, respectively. Components are weighted equally within each decile, the document said.

Sustainable Momentum

The Principal Sustainable Momentum Index ETF targets stocks with strong price momentum. The methodology takes into account historical pricing and multiple market environments, calculating intermediate and long-term factors in order to assign each stock a sustainable momentum score.

Components are sorted into two groups, with the top 10 deciles weighted at 75% of the portfolio, and deciles 11 through 15 weighted at 25% of the portfolio. The stocks in each group are equally weighted, the prospectus said.

It also noted that the index is generally rebalanced annually, but that more frequent rebalancings could occur if the market’s volatility levels warrant it.

The filing did not include expense ratios or tickers, but it indicated the funds would launch on the Nasdaq stock exchange.

Contact Heather Bell at [email protected].