Historical data indicate that companies with competitive moats and pricing power in their respective industries can deliver outperformance for investors, a theme the Principal Price Setters Index ETF (NasdaqGM: PSET) capitalizes on.
PSET tries to reflect the performance of the Nasdaq U.S. Price Setters Index, which takes mid- and large-cap U.S. companies from the Nasdaq U.S. Large Mid Cap Index that exhibit high degrees of purchasing power. Essentially, these companies can raise prices of their products or services without experiencing diminished demand. Additionally, the components show consistent sales growth, high/stable margins, quality earnings, low leverage and high levels of profitability.
Although it’s an index-based product, PSET has an element of active design to it as its 149 components are scored on quality, profitability, brand recognition and durability across various market cycles.
Multiple Investment Factor Blend
A primary benefit of PSET is that it blends multiple investment factors, meaning investors don’t have to attempt to time growth or value.
The value, quality, momentum, size, and volatility factors are among the most well-known equity factors utilized in smart beta ETF strategies. Momentum identifies stocks appreciating in value. Value looks for cheap stocks relative to fundamentals like book yield, earning yield or cash-flow yield, Quality stocks have healthy balance sheets and exhibit steady profitability. Smaller stocks tend to outperform larger stocks over time.
PSET has some quality leanings as highlighted by a more than 20% weight to technology stocks and a 15.80% allocation to healthcare names. Those sector weights are important in today’s turbulent market environment not only because tech and healthcare meet the PSET requisite of pricing power, but also because those groups generate significant free cash and flow and have rock-solid balance sheets.
Historical data indicate the quality factor is a winner over long holdings periods. Quality isn’t low volatility, but the former does have a way of reducing portfolio volatility during turbulent times.
PSET “scores and ranks companies – aiming to overcome the tendency of investing in familiar and well-known companies, a common pitfall for active large-cap investors,” according to Principal. “Portfolio construction favors companies with the strongest quality characteristics and goes beyond cap weighting for further diversification.”
PSET charges 0.29% per year, or $29 on a $10,000 investment, a favorable cost structure for a fund of this nature.
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.