ETF Trends recently caught up with James Norungolo, Investment Specialist, U.S. Equity at T. Rowe Price, to discuss whether the recent market environment has favored active ETFs.
T. Rowe Price debuted four actively managed ETF strategies in August 2020 — the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI) and T. Rowe Price Growth Stock ETF (TGRW).
Currently indexes – the thing you’ll be measured against – are extremely top heavy. Does that make it easier or hard to do the job?
No doubt the index concentration is a front and center issue for the industry. If we look at the top names, say in the growth index, there’s certainly some of those names where we have healthy exposures where we are even overweight. We would say that concentration in some cases has been just fine. You can look at a company like Amazon and look at the growth on multiple legs of their business. If you think about e-commerce and how much e-commerce penetration has increased this year and then the importance of the cloud and their position with AWS. Outside of China, I believe it’s the fastest growing ad business as well. They’ve got, in my opinion, three legs of the stool, so yes it’s a very concentrated piece of the growth index, but we think it’s a business that you could justify having a larger exposure to, given the different large and growing markets that they are attacking.
To the extent that some of these bigger names, Apple is a great example, are driving broad market performance. If you’re not there, it can be a headwind in the short-term, but we’re trying not to manage on a quarter-to-quarter basis and taking a longer view. Not to pick on Apple, but it’s a company where we have exposure, albeit less than its index weight, but we still want to see more proof that they’re going to be able to fully handoff the baton from a mature iPhone business more fully to services and what their services can really drive the growth going forward. It’s an issue all these big companies will be up against, interms of the law of large numbers and how do you sustain your growth? It’s one where we’re a little bit more cautious on Apple. We do have exposure, we recognize that the 5G product is likely to spark a more healthy upgrade cycle for their existing user base and they bring new entrants into the ecosystem. We’re looking for more proof there can be a hand-off from the hardware to the services piece.
How quickly do you react to the news cycle?
It’s very rare that we will make an abrupt portfolio shift based on the immediate news cycle. There are going to be periods of time where our thesis on a name like Apple doesn’t play out where the stock continues to run… we don’t have as much exposure and that’s a headwind. But what we’re trying to do is take a longer term view on a company like Amazon and take a longer term view on a company like Apple then throw in what we believe are reasonable valuations on top of those stories and deciding is this a company that we feel comfortable owning at an exposure that’s meaningful relative to the benchmark.
How important is risk management in your process?
As far as risk management is concerned, obviously risk management is a key component of the process. I wouldn’t say that it drives the overall investment direction. We, like any manager in the space, are going to have reasonable guard rails around portfolio construction in terms of sector exposure and in terms of active bets on individual positions. We certainly have detailed, robust, and continual risk management processes which support understanding both intended and unintended bets in the portfolio from a factor standpoint, from a sector standpoint and from a risk attribution standpoint. But again, risk management is a piece of the process which supports the ultimate goal which is bottom-up, stock-by-stock selection within those guard rails.
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