Revisiting the Case for Active Equity ETFs | ETF Trends

The U.S. exchange traded funds industry is roughly three decades old, and even today, the universe of equity-based ETFs remains largely dominated by passive offerings.

There are good reasons for that, including low fees and a creation/redemption process that creates tax benefits relative to actively managed mutual funds. However, the perks possessed by passive ETFs can and do extend to their active counterparts. Additionally, amid this year’s turbulent market environment created by rising inflation and high inflation, some investors are seeking out the comfort and potential strategic advantages offered by active management.

“They’ve gradually gained momentum among once-skeptical active managers in recent years, though, thanks to innovations designed to satisfy the concerns of heretofore hesitant active managers as well as desperation to stem the tide of asset flows from traditional mutual funds to ETFs,” noted Morningstar analyst Stephen Welch.

Adding to the case for active equity ETFs is familiarity. Translation: Many of the active fund managers that investors came to know and love prior to the dawn of ETFs are now in the ETF game. Many have joined that game in a big way, with one popular strategy being to launch ETF equivalents of famed active mutual funds. T. Rowe Price is part of that group.

“T. Rowe Price’s five semitransparent ETFs include versions of T. Rowe Price Blue Chip Growth (TRBCX) and T. Rowe Price Growth Stock (PRGFX), both rated Silver. The ETFs give investors without institutional-sized assets access to well-managed strategies at institutional prices,” added Welch.

The issuer’s ETF lineup features several blue-chip, equity income plays, including the T. Rowe Price Blue Chip Growth ETF (TCHP), the T. Rowe Price Dividend Growth ETF (TDVG), and the T. Rowe Price Equity Income ETF (TEQI). That trio could be highly appealing to investors today because dividends are rising, dividend stocks often beat inflation, and they are less volatile than non-payout names.

T. Rowe Price ETFs are already delivering some benefits for investors, particularly on the capital gains front, as highlighted by Morningstar’s Welch.

“These ETFs also have been more tax-efficient than their mutual fund twins since they started in late 2020. Both T. Rowe Price Blue Chip Growth and T. Rowe Price Growth Stock distributed roughly 10% of NAV in capital gains in 2021 versus less than 1% for the ETFs, owing in part to the tax advantages of the ETF and the fact the new ETFs probably had lower embedded gains,” according to the analyst.

Other ETFs in the issuer’s lineup include the T. Rowe Price Growth Stock ETF (TGRW) and the T. Rowe Price U.S. Equity Research ETF (TSPA).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.