Principal’s Kim On Building An ETF Lineup

June 16, 2017

IMN and Ritholtz Wealth Management’s Evidence-Based Investing Conference (West) is June 25-27 in Dana Point, California. Paul Kim, Principal Global Investors’ head of ETF strategy, will be on one of the first panels of the conference. Here, he discusses his upcoming panel and his firm’s approach to the ETF space. You’re on one of the earliest panels at the conference, The Launchpad: Exploring New ETFs. What are you planning to talk about?

Kim: I thought it would be a great chance to talk about, obviously, [the recent launch] of the Principal Active Global Dividend Income ETF (GDVD), and our launch of the Principal U.S. Small Cap Index ETF (PSC) in late 2016, to discuss how active managers are generally taking the approach of either offering smart beta and/or active.

Obviously, they can't compete with the Schwabs and Vanguards, so how do active managers who are new entrants in an increasingly crowded field of 80-ish ETF providers stand out?

I’m planning to cite GDVD and PSC as examples of ETFs where we found ways to scale up.

PSC, for smart-beta funds, is doing exactly what we had hoped, which is beat the market-cap-weighted competitors, such as IWM [iShares Russell 2000 ETF] and IJR [iShares Core S&P Small Cap ETF], by a lot since inception. GDVD is doing the same.

But Stephen Clarke of NextShares is on the same panel, so he might ask why GDVD is a disclosed ETF. Why did we get comfortable disclosing that rather than trying to push it into a NextShares vehicle, since we were a consortium member?

I’d like to talk about the pros and cons of using an established vehicle versus one that’s starting to get traction and has the benefit of not having to disclose its holdings on a daily basis. What is your take on that?

Kim: In terms of the advantages, in many cases, portfolio managers have a black or white view on whether they're willing to disclose or not. And if they're in the camp that they don’t want to disclose, it’s not a pros and con.

There’s one path forward, which would really be one of the now-increasingly different approaches to nontransparent ETFs that are proposed or the version that’s already approved. That’s the only route you have, if they're clearly in the camp of not disclosing.

What are the two major concerns of disclosure? One is front-running. You don’t want to get somebody to decrease your alpha potential by trading ahead of you, or moving the market before you start trading so that you get a worse execution.


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