Principal Plans New Multifactor ETFs

Principal has filed for three ETFs that will implement a multifactor approach targeting value, quality growth and momentum factors. The three proposed funds and their expense ratios are as follows:

• Principal International Multi-Factor Core Index ETF, 0.25%
• Principal U.S. Large-Cap Multi-Factor Core Index ETF, 0.15%
• Principal U.S. Small-MidCap Multi-Factor Core Index ETF, 0.20%

The filing did not include tickers or a listing exchange.

This would not be Principal’s first foray into the multifactor space. The firm’s most successful ETF is the $1.6 billion Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC). Two other multifactor funds cover the small-cap and international spaces.

The methodologies have a range of differences from the proposed ETFs, but notably ETFs in this latest filing all include the word “Core” in their names and in the names of their underlying indexes, suggesting more focused portfolios.

Methodology

The methodology starts out the same for each “Multi-Factor Core” fund, with a broad-based Nasdaq index used as the starting universe. Stocks within the universe that rank in the top 50% by market cap are assigned a score based on their factor exposures and then ranked. They are then weighted by modified market cap, with stocks ranking higher seeing their weights adjusted upward, the prospectus says.

The remaining bottom half of the starting universe based on market cap is also ranked based on factor exposures. For the international fund, the top half of this portion of the universe is selected for inclusion and then equal weighted by currency, according to the document. The same process is followed for the large cap U.S. fund, but rather than currency, the selected components are equal weighted by sector.

The methodology for the small-midcap fund’s index is a bit more complex. It ranks the components by factor score and selects the top 20% for each sector, weighting the selected components based on liquidity and volatility. The methodology caps each security weight at 0.50% and then removes the bottom 10% of the remaining components based on liquidity.

All of the underlying indexes for the proposed funds are rebalanced every six months, the prospectus says.

Contact Heather Bell at [email protected]