Principal Adding 2 Factor ETFs

Today Principal is rolling out two single-factor ETFs, expanding the firm’s lineup in that area. Just last week, it launched the Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC), which is one of the few funds to offer a smart-beta twist on the mega-cap space.

The two funds launching today are the Principal Contrarian Value Index ETF (PVAL) and the Principal Sustainable Momentum Index ETF (PMOM). Both funds list on the Nasdaq exchange and come with an expense ratio of 0.29%.

Both funds track indexes derived from the Nasdaq US Large Mid Cap Index using quantitative models designed to take into account multiple market environments. The indexes rebalance annually. But from there, the methodologies diverge.

Value Fund

PVAL’s index identifies equities undervalued by the market compared with their fundamental value. The methodology uses book yields over the past 28 quarters to determine whether the market is in bear territory or conditions are normal.

This analysis is conducted quarterly, and a special rebalance can be triggered if there is a reversal in the trend. When the market is bearish, the methodology selects the top 30% of companies based on their book yields. Under normal market conditions, those rankings are adjusted based on leverage, volatility and forward-earnings dispersion before the top 30% are selected, according to the prospectus.

The companies selected for the index are weighted based on their rankings, with more weight given to those that rank higher. Financials are separated out and selected apart from the other securities due to their different performance. The prospectus notes the index maintains the sector’s weight in the Industry Classification Benchmark.

At the end of September, the index had 255 components, according to the prospectus.

Momentum Fund

PMOM targets companies exhibiting sustainable momentum based on intermediate- and long-term risk-adjusted returns. The composite score used to select the securities also incorporate a volatility adjustment. To be selected, companies must fall within the top 15% of the momentum score rankings, but to remain in the index, they simply need to stay in the top 35% of the rankings. As with PVAL, the rankings and volatility are used to determine weighting.

Market volatility is monitored on a monthly basis, the prospectus said, and if it rises sharply, a special rebalance can be triggered. As of the end of September, PMOM’s index included 119 components.

The new funds bring Principal’s total offering to 11 ETFs.

Contact Heather Bell at [email protected]