equities | august 21, 2020
Active ETFs—Building on a Tradition of Innovation
Our proprietary process is designed to protect our intellectual capital.
Active ETFs are the latest “wrapper” we have put around our core “product”—rigorous research and putting clients first.
Our approach uses proxy baskets and daily risk metrics to allow accurate pricing while shielding our investment decisions.
We are launching ETFs based on four of our flagship strategies and plan on building a robust lineup of offerings.
Our firm has continuously evolved in the decades since 1937, when our founder, Thomas Rowe Price, Jr., began offering what today would be described as “separately managed accounts” for individuals. In 1950, for example, we opened our first mutual fund and welcomed our first institutional clients, and in 1974, we led the industry by introducing our first company-sponsored defined contribution plan. While the “wrappers” have changed, our core “product”—portfolios based on rigorous research and putting clients first—has remained constant.
On August 5, we took another important step in our product evolution by unveiling our first actively managed exchange-traded funds (ETFs)—the culmination of well over a decade of preparation. Our decision to begin offering active ETFs reflects our ongoing desire to meet the changing needs of clients. ETFs have become increasingly popular in recent years for several reasons. These include their tax efficiency, the ability to buy and sell ETFs throughout the trading day, and generally lower costs. Our aim is to provide the type of asset management services that investors prefer. We want to meet clients where they are by offering an array of product formats, including mutual funds, ETFs, separately managed accounts, and collective investment trusts.
We have long believed that we could deliver the benefits of T. Rowe Price’s thoughtful fundamental research and long-term perspective in the form of an ETF. So why are we making this move now? Since the original launch of ETFs in 1993, the majority of assets have been concentrated in passive strategies designed to replicate the performance of indexes. Active ETFs were only introduced in 2008, with most focused on fixed income, quantitative, or factor-based strategies.
A few “transparent” active ETFs that focused on equities also became available. Because they were required to disclose holdings daily, however, these ETFs carried the risk of “front-running,” or efforts by others to profit from the manager’s moves by attempting to mirror purchases and sales of a security in advance—thus trimming profits from the ETF’s investors. These structures would not accommodate our desire to offer actively managed ETFs that protect our intellectual property and the interests of our clients.
We knew we could accomplish both goals with a properly designed active ETF structure. In 2013, we took the lead in the industry by filing plans with the Securities and Exchange Commission for this novel type of security. It has been a long road, but we recently received final regulatory approval to begin offering ETFs using a proprietary process that shields our daily investment decisions while allowing accurate pricing of the security.
This carefully designed active ETF approach has two main features:
We are providing market makers—firms that facilitate trading in the ETF—with a daily “proxy basket” instead of a full list of actual underlying holdings. This proxy basket will overlap with at least 80% of the current portfolio, but it will typically exclude the securities that we are currently in the process of either selling or accumulating. As with our mutual funds, we will provide a full list of our holdings 15 days after the end of each quarter.
To further ensure accurate pricing of the ETF, a 15-second intraday net asset value (iNAV) is published that reflects the actual value of the underlying portfolio. Along with this information, our partners will receive daily risk measures that quantify the relationship between current holdings and the proxy basket.
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Together, these measures will help market makers keep the price of the ETF closely in line with the value of the underlying securities. It is important to note that we worked closely with market makers to develop a process and pricing signals that fit their needs and made them comfortable.
To manage this new business line, we have invested significantly in creating a new business division. The team will be led by Tim Coyne, an industry veteran with extensive experience in ETFs. Tim joined the firm last year, and I have been impressed with how well he fits into our culture—particularly, in believing that serving the interests of our clients is our top priority.
We have started our ETF lineup with offerings based on four of our flagship equity strategies: Blue Chip Growth, Dividend Growth, Equity Income, and Growth Stock. We expect the ETFs to be very similar to the strategies but not identical, and they will have their own performance histories and track records. Over time, we expect to include other strategies and build a robust lineup of ETF offerings.
Thanks to the tireless efforts of my colleagues, this work was barely slowed by the unprecedented turmoil of the past several months. I view it as another example of the significant investment we are making in a future that I believe remains bright for both T. Rowe Price and our clients.
For more information regarding the unique attributes and risks of our ETFs, please visit:
ETFs are bought and sold at market prices, not NAV. Investors generally incur the cost of the spread between the prices at which shares are bought and sold. Buying and selling shares may result in brokerage commissions which will reduce returns.
This ETF publishes a daily Proxy Portfolio, a basket of securities designed to closely track the daily performance of the actual portfolio holdings. While the Proxy Portfolio includes some of the ETFs holdings, it is not the actual portfolio. Daily portfolio statistics will be provided as an indication of the similarities and differences between the Proxy Portfolio and the actual holdings. The Proxy Portfolio and other metrics, including Portfolio Overlap, are intended to provide investors and traders with enough information encourage transactions that help keep the ETF’s market price close to its NAV. There is a risk that market prices will differ from the NAV, ETFs trading on the basis of a Proxy Portfolio may trade at a wider bid/ask spread than shares of ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility and, therefore, may cost investors more to trade. The ETF’s daily Proxy Portfolio, Portfolio Overlap and other tracking data are available at troweprice.com.
Although the ETF seeks to benefit from keeping its portfolio information confidential, others may attempt to use publicly available information to identify the ETF’s investment and trading strategy. If successful, these trading practices may have the potential to reduce the efficiency and performance of the ETF.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of August 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
The fund is subject to market risk, as well as risks associated with unfavorable currency exchange rates and political economic uncertainty abroad.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
T. Rowe Price Investment Services, Inc., distributor, T. Rowe Price ETFs. T. Rowe Price Associates, Inc., investment adviser. T. Rowe Price Investment Services, Inc. and T. Rowe Price Associates, Inc. are affiliated companies.
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