Principal Global launches active tax-advantaged income ETF

Jun 18th, 2020 | By | Category: Fixed Income

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Principal Global Investors has launched a new actively managed ETF designed to help US taxpayers boost their after-tax income.

Principal Global launches active tax-advantaged income ETF

The fund is aimed at helping US investors boost their after-tax income.

The Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI US) invests in a wide range of preferred and capital securities paying dividends that qualify for favourable US federal income tax treatment.

The fund has listed on NYSE Arca with seed capital of $20 million and comes with an expense ratio of 0.60%.

According to the fund’s prospectus, the fund may invest in US dollar-denominated securities from most major sectors of the global preferred and capital securities market.

Eligible securities include preferred stock, certain depositary receipts, real estate investment trusts (REITs), junior subordinated debt, and contingent convertible (CoCo) bonds.

Preferred securities pay fixed or floating-rate distributions and are junior to all forms of company debt; however, they tend to have preference over common stock in the payment of distributions and the liquidation of a company’s assets.

Coco bonds are hybrid debt securities issued by non-US banks that have contractual equity conversion or principal write-down features that are triggered by the breach of regulatory capital thresholds.

The fund will primarily target securities that pay tax-advantaged income but may also invest in non-tax-advantaged securities. It is permitted to invest across both investment-grade and high-yield securities but is expected to focus on higher-quality issuers.

The fund is benchmarked to the ICE BofA 7% Constrained DRD Eligible Preferred Securities Index which measured the performance of investment-grade preferred securities that are eligible for dividends received deduction (DRD). Issuer exposure is capped at 7%.

The fund is aimed at US income-seeking investors who have been starved of yield as record low interest rates and central bank intervention have pushed bond yields down.

Investors may also support the notion of an actively managed investment in the preferred and capital securities market as the various product structures can be confusing. The fund is managed by Spectrum Asset Management, a subsidiary of Principal Global Investors specializing in the different types of yield features, liquidity, and covenants associated with these securities.

Kamal Bhatia, President and CEO, Principal Funds, commented, “This ‘first mover’ active ETF represents an improved alternative to the roughly $25 billion passive preferred securities ETF market, concentrated in $25 par preferreds, and aims to provide tax-advantaged income to US taxpayers.

“We know our advisory clients are craving long-term opportunities that generate tax-efficient spread income with substantial value from actively managing in a permanently altered financial environment. We built this strategy simply with their voices behind it.”

Spectrum also manages the Principal Spectrum Preferred Securities Active ETF (PREF US) which focuses exclusively on the $1,000 par institutional preferred securities sector. This fund comes with an expense ratio of 0.55% and houses $140 million in assets under management.

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