The combination of a middling Process Pillar rating and a Below Average People Pillar rating limit  Principal US Small Cap ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The longest-tenured manager is experienced, but other weaknesses limit the strategy to a Below Average People Pillar rating. The strategy merits an Average Process Pillar rating.  High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy's parent organization earns the firm an Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

Analyst Rating

Super Micro Computer

Comfort Systems USA

Permian Resources Corp

Atkore International Group

Jackson Financial

Beacon Roofing Supply

Cadence Bank

Boot Barn Hlds

Lantheus Holdings

e.l.f. Beauty

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. Principal US Small Cap ETF earns an Average Process Pillar rating. 

The primary contributor to the rating is the fund's strong long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. The process is limited by the parent firm's five-year risk-adjusted success ratio of 52%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. The parent's relatively low success ratio suggests that the firm could do better across its fund lineup.

 This strategy tends to hold smaller, deeper value companies compared with its average peer in the Small Blend Morningstar Category. Examining additional factor exposure, this strategy has consistently tilted toward companies with relatively higher trading volumes in the last few years. This gives the managers more flexibility during bear markets to sell without adversely affecting prices. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy also has had an overweight bias to the volatility factor over these years, meaning it has owned companies that have a higher historical standard deviation of returns. Such stocks tend to rise faster and fall harder than the broad market. High-volatility exposure contributes to stronger performance during bull markets, but often at the cost of losing more during downturns. Compared with category peers, the strategy also had more exposure to the Volatility factor in the most recent month. This strategy also has tilted toward low-quality stocks, companies with higher financial leverage and lower profitability over these years. Such positions do not tend to provide much ballast for a portfolio. In this month, however, the strategy had more exposure to the Quality factor than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio has allocations in its top two sectors, technology and energy, that are similar to the category. The sectors with low exposure compared to category peers are industrials and consumer cyclical, with industrials underweighting the average portfolio by 3.1 percentage points of assets and consumer cyclical similar to the average. The portfolio is composed of 509 holdings and is diversified among those holdings. In its most recent portfolio, 8.1% of the fund’s assets were concentrated in the top 10 fund holdings, compared to the category’s 24.4% average. And in closing, in terms of portfolio turnover, looking at year-over-year movements, 74% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

Principal US Small Cap ETF earns a Below Average People Pillar rating. The team is supported by the portfolio managers' outperformance of peers at the funds they run, as measured by their combined three-year manager excess returns. The instability of its management team holds the team back. The fund last saw a manager change seven months ago.


Aaron J. Siebel, the longest-tenured manager, has five years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 3.2 stars, reflecting average risk-adjusted performance compared to category peers. Aaron J. Siebel has an experienced listed co-manager. Together, they average 14 years of listed portfolio management experience.

Below Average

People

Principal Asset Management follows client demand around the world and across asset classes. While the firm’s sensitivity to market trend can help better serve clients, its sprawling efforts have also led to mixed results. Its Parent rating remains Average.

The firm relies on multiple investment boutiques and teams to drive investment results, some of which have established solid records. Aligned Investors and Edge Asset Management run strategies that Morningstar analysts regard highly, and the real estate team also enjoys high ratings. While benefiting from Principal’s sales and operational support, these small teams invest and develop new strategies independently. On the other hand, Principal’s core fixed income and equity teams are less inspiring, and many of the actively managed exchange-traded funds launched recently by these teams have already been liquidated.

Principal continues to take steps to keep up with the competition, though execution risk exists amid all these efforts. It reorganized its data science team after a leadership departure with the goal of it work more closely with the firm’s investment teams. Principal has also been proactive in adding personnel and operational resources in its drive to build up its multi-asset solution and its liability-driven investing capabilities, and the firm continues to leverage its global presence to enter emerging markets.

Parent

Principal U.S. Small-Cap Multi-Factor Index ETF

PSC is actively managed to invest in small-cap US companies. The fund uses a proprietary, quantitative model to construct the portfolio.

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