How T. Rowe Price's Active ETFs Enhanced Diversification Potential

T. Rowe Price launched four active ETFs in August 2020, providing access to the firm’s time‑tested strategic investing expertise in a new set of vehicles. Relying on the same managers as four of T. Rowe Price’s flagship U.S. large‑cap investment strategies that have been available to clients for decades meant allowing for similar strategies to build up separate histories and track records for these funds.

As detailed in T. Rowe Price’s article, “Accessing U.S. Equities With T. Rowe Price Active ETFs,” While all four ETFs use the S&P 500 Index as either their primary or secondary benchmark, each focuses on a different approach to the U.S. large‑cap market and seeks to leverage specific fundamental return factors to drive active performance. The funds include:

Blended Portfolios

As stated in the article, “Using a global risk model and the actual holdings in the T. Rowe Price ETFs as of the day of their launch (August 5, 2020), we derived estimates of potential characteristics for the four strategies.” (For more information, see the original article.)

An analysis of ETF return potential was developed based on their forward‑looking potential betas to the S&P 500 and T. Rowe Price’s capital market assumptions, which reflect the company’s extensive research team’s views. Using this analysis, the company then investigated blended portfolios to identify the ETF allocations believed to have the potential to produce attractive excess returns relative to tracking error and provide some risk mitigation in tail events.

Minimal potential diversification benefit across the strategies was found. However, potential excess return correlations appeared to offer opportunities to enhance diversification.

After analyzing historical performance and representative positioning within T. Rowe Price’s four U.S. large‑cap equity strategies and ETFs, respectively, there’s the accepted belief that blended portfolios incorporating allocations to all four strategies can provide investors with a balanced exposure to the U.S. large‑cap equity market and can potentially help them seek enhanced risk‑adjusted performance through active management.

“While markets are notoriously cyclical, we believe that the allocations outlined here represent an opportunity to access T. Rowe Price’s strategic investing approach to U.S. large‑cap equities in a balanced and diversified way.”

For more information about the T. Rowe Price analysis, please refer to their white paper (note: for financial professional audiences only).

For more on active strategies, visit our Active ETFs Channel.