Principal Global Investors is planning to convert its largest exchange traded fund and five others into actively managed strategies, disclosures show.
The manager intends to overhaul the investment strategies of its $1.6bn Principal US Mega-Cap ETF, $771mn Principal US Small-Cap Multi-Factor ETF, $235mn Principal Value ETF, $86mn Principal Quality ETF, $71mn Principal Healthcare Innovators ETF and $27mn Principal Millennials ETF, according to disclosures.
The changes are expected to go into effect on or about July 15, the filing says.
Though the switch to active does not require shareholder approval, investors must consent to changes to several of the funds’ fundamental investing restrictions in order to invest actively, disclosures show. A special shareholder meeting is scheduled for May 24.
If the changes are executed, the Des Moines, Iowa-based group’s ETF family would only include active strategies, according to Morningstar Direct data. Principal’s 14 ETFs together held $4bn in assets as of the end of February, the database shows.
Principal’s ETFs bled a combined $354mn during the 12-month period ended February 28, including $674mn in the first two months of 2022, Morningstar Direct data show.
This is the group’s first big product overhaul announced since Nick Walstrom became its head of product strategy. Walstrom joined Principal last month from RBC Global Asset Management. In his new job, he spearheads the development of new ETFs, among other duties.
Broadly, the management style changes will “capitalise on our strengths as an active manager”, the company said, and give portfolio managers more flexibility in making changes to the portfolio to optimise efficiency.
A handful of other companies have recently announced passive-to-active swaps.
Franklin Templeton plans to convert the $19mn Legg Mason Small-Cap Quality Value ETF next month from a self-indexed strategy to an active one, and rename it the Royce Quant Small-Cap Quality Value ETF, filings show. Alpha Architect said in January that it would turn five ETFs into active strategies — after converting them to passive ones five years earlier.
Converting passive ETFs to active ones has been “a mixed bag for attracting new flows”, said Elisabeth Kashner, director of global fund analytics at FactSet. Sales dynamics tend to vary from fund to fund, she noted.
In 2008, for example, Guggenheim Investments converted its passive Ultra Short Income ETF to active, which helped propel the ETF from $20mn in assets to $2.5bn today, she said.
WisdomTree’s conversions, however, have been not as successful in sparking sales, Kashner noted. The group converted two active ETFs to passive in 2018. One, the Emerging Markets Consumer Growth Fund, shut in 2020, according to its product page. The other, the Emerging Markets Quality Dividend Growth Fund, held about $87mn as of March 31.
Given Principal’s ETF net outflows, “maybe the good news here is that Principal has recognised that their current approach isn’t working particularly well and has decided to change course”, Kashner said
Industry-wide, assets in active ETFs, including those that invest in stocks such as the Principal ETFs, have gathered assets in recent months. Active strategies represented $302bn at the end of February, or a 4.4 per cent share of assets in the wrapper, up from $217bn, or a 3.8 per cent share, a year earlier, Morningstar’s database shows.
Active US equity strategies amassed $16.9bn in the 12-month period, and active international equities pulled in $8.5bn, Morningstar’s database shows. Active ETF launches last year surpassed index-based ones for the first time.
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