Money Managers Extend Skills Into ETF Wrapper

With the exchange traded funds continuing to gain popularity across various investor groups, more traditional asset managers are looking into the space as a way to expand their businesses and attract new investors.

“At Principal, we are really leaders in the retirement space, which means we have a very long heritage being an asset-allocation expert, and we are really bringing that expertise to the ETF space. So, our goal is to be a top player in the ETF business but also extending our legacy and intelligence of doing asset allocation,” Kamal Bhatia, President CEO, Principal Funds, said at the Inside ETFs conference.

For instance, the Principal EDGE Active Income ETF (YLD C+) is an actively managed multi-asset fund. Multi-asset ETFs have provided diversified exposure to a group of various asset classes and generated attractive yields and have become income investor favorites as advisors and investors searched for new yield sources amid several years of rock-bottom U.S. interest rates.

YLD seeks to generate consistent income through changing market environments and over market cycles. It invests opportunistically across a diversified range of income-generating asset classes while managing for risk. EDGE’s proven investment process, long history of income investing, and strong risk management and credit research capabilities may help enhance returns while reducing risks.

Additionally, smart beta or factor-based strategies may be one way for investors to hedge risks. For example, the Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC) is comprised of companies with the largest market capitalization taken from the Nasdaq U.S. 500 Large Cap Index and screened based on a quantitative model. USMC is a multi-factor fund, an increasingly popular strategy within the broader smart beta universe.

USMC’s underlying index utilizes a modified equal-dollar weighting methodology where securities in the top 10% of aggregate market capitalization are weighted by market cap, but the remaining securities are equally weighted and volatility adjusted to give a higher tilt toward those that are more liquid and less volatile.