Fill in Some Important Cap Gaps With This Multi-Factor ETFs | ETF Trends

Typical cap-weighted, broad market index funds are heavy on large-cap equities, forcing investors to look elsewhere to fill the mid- and small-cap voids. That’s an objective the Principal U.S. Small-Mid Cap Multi-Factor Core Index ETF (PSM) is built for.

Principal’s multi-factor core ETFs, including PSM, are designed to serve as the foundation of an investor’s portfolio, complementing alpha-generating, high active share strategies. As a global asset manager with a heritage of factor investing expertise, Principal now offers a broader set of factor-based strategies to address a wider net of investment objectives and outcomes.

PSM is designed to provide broad index-aware U.S. small, mid-cap equity exposure while incorporating a multi-factor model and modified weighting process to potentially enhance the risk/return profile. Multi-factor model seeks to identify equity securities of companies in the Nasdaq US Small Cap IndexSM and Nasdaq US Mid Cap IndexSM that exhibit potential for high degrees of sustainable shareholder yield (value), pricing power (quality growth), and strong momentum. The Fund’s objective is to track the Nasdaq US Small Mid Cap Select Leaders Core IndexSM.

Powerful Potential With PSM

PSM can augment large-cap equity exposure because the Principal ETF holds an array of smaller stocks not found in the benchmark U.S. equity index.

The average market capitalization of PSM’s 610 holdings is just over $4 billion, putting the fund at the lower end of mid-cap territory.

Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

The mid-caps segment has also outperformed their large-cap peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.

However, PSM goes beyond what typical mid-cap funds offer, ranking its components with a combination of quality, shareholder yield (a mix of buybacks and dividends) and momentum. Instead of just focusing on dividend payments alone, the shareholder yield ETF strategies invest stocks that couple strong dividend payments with share repurchases and debt paydown.

Introducing shareholder yield into the equation may be a better way to identify stocks that possess strong cash flows and that have the potential to reward shareholders with higher yields.

PSM charges just 0.20% per year, or $20 on a $10,000 investment, making it cost-effective among small/mid-cap multi-factor strategies.

For more on multi-factor strategies, visit our Multi-Factor Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.