Principal lists value and momentum ETFs
Boston-based issuer Principal is listing two new factor ETFs, the Principal Contrarian Value Index ETF (PVAL) and the Principal Sustainable Momentum Index ETF (PMOM).
Like most value ETFs, PVAL puts together an index of undervalued companies using quantitative methods. PVAL does this by starting with a parent index, the Nasdaq US Large Mid Cap Index, and ranking its companies by books yield.
There are then two things PVAL does to make its value ETF contrarian.
First, which companies it selects depend heavily on market conditions. In a bear market, PVAL takes the top three deciles by book yield. During a “normal market”, however, PVAL tries to avoid “book yield traps” and ranks companies instead by debt, stock price and forward earnings volatility.
Second, financial services get special treatment. Finance is excluded from the general mix and is ranked in its own separate column. For this separate column, financial services companies in the top three deciles are chosen.
PMOM is a momentum ETF that tries to find companies whose momentum is sustainable.
PMON builds a momentum strategy around the NASDAQ by sorting the index into 15 layers. It gives the top 10 of these layers 75% of the portfolio. Layers 11 through to 15 get only 25%. Stocks within each group are equally weighted, by the different groups get different weights.
**Writer’s aside: there appears to be an error in the prospectus. In explaining PMOM, it says: “The top 15 deciles are included in the Index.” Yet there can, by definition, only be 10 deciles in any statistical field. For this reason, the writer has referred to the “deciles” as layers.