Principal Group ‘Not Going To Stop At One ETF’

Another giant wealth manager jumps into the ETF pool.

Reviewed by: Drew Voros
Edited by: Drew Voros

The Principal Financial Group is nationally known for investment management and as a provider of 401(k) retirement plans, mutual funds and insurance. The firm, which has $500 billion in assets under management, launched its first ETF on July 9. And as Paul Kim, managing director, ETF strategy at Principal Global Investors, told, the company is not looking to just a dip a toe in the ETF market; rather, they are planning a broad ETF lineup incorporating active as well as passive structures, and exchange-traded-managed funds (ETMFs). Why is The Principal Group coming into the ETF space?

Paul Kim: I would characterize this as an extension of our existing capabilities; obviously an important growth area for a big global asset management firm. For investors who prefer the ETF vehicle, this provides an access point to The Principal. And for us, we can access an increasingly large set of clients—both institutional and retail—who have a strong preference for the ETF vehicle. Your first ETF you launched this month, the Principal Edge Active Income ETF (YLD), is an active fund. Are you concentrating in the active space?

Kim: We've filed for index ETF relief. We've also filed recently for ETMF redemptive relief. Our exchange-traded fund strategy will encompass at least two of those—both active and passive. And to the extent that ETMFs get traction, we will certainly evaluate opportunities to offer strategies where daily disclosure is a significant concern.

The ETMF is more for long-term flexibility. But as far as the active and passive ETF structures—the more traditional ETFs—we will have more to come beyond our first active ETF. We're not going to stop at one ETF. And how are you planning to win market share?

Kim: We're going to leverage our existing sales teams. I think of it as getting broader and broader across our sales channels. In the beginning, we're going to focus on RIAs and eventually make our way to the national accounts over time, as we get approvals on various platforms. And then at the same time, we're going to target institutional investors with ETFs when it makes sense.

We’ll leverage our existing sales abilities and capabilities, and over time, the organization will learn the nuances of the ETF vehicle and be able to offer ETF strategies alongside our existing strategies and different vehicles. You were an ETF product manager at PIMCO before coming to The Principal this year. PIMCO’s known as having some of the most famous active managers in the world. What are some of the lessons you learned there?

Kim: The lessons I've learned are: If an active ETF can add value relative to passive alternatives, there's an appetite for that. Active ETFs can get traction. But the value proposition has to be clear.

That may be after-fee performance; it may be a history of outperformance; it may be thought leadership or client servicing beyond what existing strategies offer. Ultimately, if you add value, whether you’re a passive or an active ETF, there’s the possibility to raise assets and compete.

Another way to assess value may be portfolio performance differences, such as differences in correlations, diversification benefits. We think there are a lot of ways that a firm can provide value beyond competing on price. You filed for self-indexing. Do you intend to keep all your ETF infrastructure in-house?

Kim: It's something we're working through right now. The index ETF relief we filed is meant to give us flexibility as we work through the business models to passive ETFs. For example, if we wanted to offer a smart-beta strategy, who owns that intellectual property, and who is the index provider or calculation agent?

Those are decisions we continue to work on. But we certainly have the capability and a track record of providing quantitative strategies here. And we'd like to bring those to market through the index ETF wrapper. Your new fund, YLD, is a multiasset ETF. There’s already one out there—the First Trust Multi-Asset Diversified Income (MDIV)—which is passive, and has $1 billion in AUM. Is it tough to compete with that kind of established fund?

Kim: I'd say there's a very, very large market for income. And a there’s very significant need for income-oriented strategies. Whether people are investing in single-sector or multisector approaches—passive or active—there's a big need and a big market. That's the high-level perspective.

From a product perspective, I think YLD is unique. Not because it's multiasset, but because of the product design. When we created the guidelines, our goal was to create a strategy that draws roughly equal risk from equities and fixed income, which—given that fixed income tends to be less risky than equities overall—means there's a larger portion of the portfolio in fixed income.

We were looking for a strategy that would target in the neighborhood of a 5 percent yield in today's environment. It’s fairly flexible, allowing us to look across various income strategies to generate an outcome.

It's a very different strategy. It's not a total-return-focused ETF. It's an income-focused ETF. Our goal is to generate income to meet investors' income needs. It's a very unique perspective on investing in multi-asset.

Over time, as investors see the returns and the income generation, I think this ETF will compete very favorably in this existing ETF universe. Any other thoughts?

Kim: I just want to highlight that we're not late [to ETFs] in any respect. If you think about the mutual fund landscape, it's about 80 percent active. And the ETF landscape is a vast reversal of that, with less than 1 percent active ETF assets.

There's a large market that's underserved, and there’s an opportunity for active ETF providers to offer ETFs, particularly in asset classes outside of fixed income. We want to be a part of that growth, and we want to help shape that growth.

The Principal is very good at managing multi-asset. We have a long history of managing income. So we look forward to this ETF, but we also have future ETFs that eventually we'll bring to market. Investor choice is good, and having additional active participants will help grow this part of the market.

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.