ETF Trends CEO Tom Lydon spoke with Ed Nini, Global Head of Product Strategy for Principal Global Investors, about the tumultuous year that has been 2020 and what kinds of strategies have been put into place with various advisors to account for it. Specifically, Lydon wanted to hear from Nini about the trends in portfolio construction, given the current state of the market.
Throughout the year, the market has seen dramatic shakeups from all over, including a downturn for some of the standard money-making sectors and the rise of tech and thematic-based ETFs, based on trends that have taken hold. As far as emerging trends are concerned, Nini speaks to how the uncertainty of 2020 has not stalled the migration of assets to lower-cost passive vehicles.
Nini notes, “We’re seeing a newfound resurgence in demand from advisors for strategies that actually apply alternative leading structures to market cap, specifically related to active ETFs and strategic beta.”
The interesting aspect of this trend is how it contradicts the whole thought process around activist debt that’s been heard for over a decade. Instead, there’s a better sense of where advisors believe active management can add value within a portfolio. This is particularly the case when seeing it through the ETF wrapper.
As Nini explains, at Principal, they are excited about this more recent advisor interest because they believe their strong legacy in active management can help guide the development of differentiated ETF strategies that can service long-term core components of advisor portfolios.
Principal On Blind Spots In Portfolio Construction
Amid the areas of uncertainty and volatility that have run through 2020, having proper guidance through the development of differentiated ETF strategies can go a long way. At the same time, there are blinds spots to look out for along the way.
Nini makes it clear that no matter how one is constructing portfolios, whether in the form of personalized solutions for each client or leveraging pre-built portfolios, it’s more important than ever to be clear on what is owned. It’s also crucial to be really thoughtful about what’s in a portfolio in planning for staying ahead of things.
“Partnering with asset managers that are experts in certain asset classes can really make a difference in the construction of a portfolio,” Nini states.
This is especially true when trying to gain exposure to certain parts of the market that are tough for investors to access independently.
Going After What’s Preferred
For example, looking at preferred securities, that’s a category that may serve as either a short or long term position or portfolio, depending on the advisor or market conditions. It is important to work with experts with deep knowledge and understanding of that space and have long-standing success in either case.
At Principal, there’s a special investment team called Spectrum Asset Management, which has over three decades of experience investing in preferred and capital securities. Advisors can utilize the Spectrum expertise through the investment vehicle they prefer.
Along with this are two ETFs, the Principal Spectrum Preferred Securities Active ETF (PREF) and the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI). These are funds to utilize when it comes to advisors finding ways to mitigate a potential blind spot in their portfolio, but not the only way.
Nini adds, “We are constantly gathering insights to see where we can help advisors incorporate other specialty or niche asset classes into the portfolio where Principal has strong capabilities.”
Principal On Tech and Healthcare Sectors
Looking at some sectors, given the market throughout 2020, some have been challenged in this environment. Other sectors have been thriving. Two prominent themes that have dominated this year are technology and healthcare.
For Nini, he agrees that healthcare and technology have dominated the headlines throughout 2020 for clear reasons, given the nature of the pandemic, and growth in the thematic space. At the same time, advisors have continued to see distinctive ways to gain access to those sectors.
With technology, the preferred investment solution among our advisor clients has been the Principal Mega-Cap ETF (USMC). As the fund focuses on mega-caps, it naturally provides access to the largest technology companies in the U.S. It’s also designed to provide downside protection during periods of market volatility.
“This has been especially valuable to investors during the volatility we’ve experienced,” Nini adds.
In regards to exposure to healthcare companies, there has been significant interest in the Principal Healthcare Innovators Index ETF (BTEC). As most advisors are underweight biotech in their portfolios, they need a diversified solution that can serve as a long-term allocation in their portfolios.
As Nini explains, “BTEC not only provides advisors with diversification across the healthcare sector, it also offers access to those small and mid-sized healthcare companies that are leading the way in innovation. That’s something that we all can really appreciate right now.”
For more market trends, visit ETF Trends.