Exchange traded fund investors who are interested in an actively managed touch to better navigate muddy market waters can consider T. Rowe Price’s new active semi-transparent investment vehicle and the proprietary process of bringing time-tested investment strategies to market in the form of an ETF.

In the recent webcast, Role of Active ETFs in Today’s Market, James Norungolo, Portfolio Specialist, U.S. Equity, T. Rowe Price, highlighted T. Rowe Price’s storied history of providing alpha for its clients and investors. Looking at 18 T. Rowe Price diversified active U.S. equity mutual funds, 89% of the funds generated positive active success rates in 10 years.

Norungolo specifically highlighted this outperformance as even the smallest amount of excess returns can have a profound impact on results over a long-term horizon. This means that investors planning for retirement can feel greater relief and accumulate enough for additional years of spending.

Looking at the ETF industry that first started in 1983 with the introduction of the first SPDR S&P 500 ETF or SPY, Timothy Coyne, Head of Exchange-Traded Funds, T. Rowe Price, pointed out that the first transparent actively managed ETF came out in 2008. Now, in 2020, we are entering the semi-transparent active milestone after the SEC approved several applications for semi-transparent active ETFs, including models from T. Rowe Price, Fidelity, Precidian, NYSE and Blue Tractor.

However, Coyne also underscored the relative lackluster growth of actively managed transparent ETFs, compared to the broader ETF universe. There is currently about $80 billion in active ETFs assets out of the $4.4 trillion in U.S.-listed ETF assets. Furthermore, most active ETFs consist of fixed-income strategies since these are harder for potential frontrunners to replicate.

“One of the hurdles that T. Rowe Price may have in the marketplace is the misconception that ETFs equal passive. That may be the case because in passive products is mainly where ETFs have historically been invested,” Coyne said.

Coyne, though, is hopeful that actively managed semi-transparent ETFs will take off after building up some momentum. He likens the build-up process to how fixed-income ETFs first came to market in 2002 but only began to grow in popularity after the financial crisis.

Scott Livingston, Head of ETF Strategy, T. Rowe Price, also emphasized that the new actively managed semi-transparent ETF investment experience will remain the same for those who are already familiar with the traditional transparent ETF investment vehicle. Investors will find the same tax-efficient in-kind creation/redemption process. Investors are still responsible for an individual cost basis. ETFs will trade continuously during market hours. The ETFs add versatility to a client portfolio. No minimum investment are required and can be traded from an individual brokerage account. Lastly, the lower operating expenses associated with the ETF structure could lead to cost savings for the investor.

“Investors will have the same trade process with T. Rowe Price Active ETFs as they are accustomed to with transparent ETFs,” Livingston said.

The Secondary Market

The secondary market for ETFs is where buyers and sellers meet to exchange shares in a security. Most ETF transactions will still occur in the secondary market. Additionally, it usually does not involve trading in the underlying securities – it is just existing ETF shares trading between market investors.

“Semi-transparent active ETFs keep the same roles and workflow as transparent ETFs but provide different information ton ensure efficient trading,” Livingston added.

Specifically, the T. Rowe Price Active ETFs will come with a type of “proxy basket” where an Authorized Participant will work through a proxy basket of securities with the ETF provider to create and redeem shares as a way to protect the particular investment strategy of the active managers.

“T. Rowe Price ETFs will leverage the benefits of the ETF structure while still maintaining our established investment process to protect trading information and existing shareholders,” Livingston said. “Our active ETF process will not make any major changes to the existing ETF ecosystem. We believe transparency exists for liquidity providers to provide efficient trading of the ETFs and protect investors – this requires accurate pricing information but not full daily holdings.”

T. Rowe Price has come out with four actively managed ETF strategies, including 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).

A Proxy Basket

All four T. Rowe Price active ETFs feature a proprietary portfolio disclosure process through the SEC approved proxy basket that ensures market makers have enough information to quote prices with a high degree of confidence, while also protecting the intellectual property of the firm’s investment professionals and the interests of its mutual fund shareholders.

The T. Rowe Price Blue Chip Growth ETF seeks to provide long-term capital growth by investing in common stocks of large and medium-sized blue-chip companies that have the potential for above-average earnings growth and are well established.

The T. Rowe Price Dividend Growth ETF seeks dividend income and long-term capital growth by investing the majority of its assets in the common stocks of dividend-paying companies expected to increase their dividends over time.

The T. Rowe Price Equity Income ETF seeks a high level of dividend income and long-term capital growth by investing most of its assets in common stocks, with an emphasis on large-capitalization stocks that have a strong track record of paying dividends or that are believed to be undervalued.

Lastly, the T. Rowe Price Growth Stock ETF seeks long-term capital growth and invests in companies that have one or more of the following: superior growth in earnings and cash flow, ability to sustain earnings momentum even during economic slowdowns, occupation of a lucrative niche in the economy, and ability to expand even during times of slow economic growth.

Financial advisors who are interested in learning more about active ETF strategies can watch the webcast here on demand.