T. Rowe Price's New ETF, TCAF, is Worthy of Appreciation

T. Rowe Price, a leading active manager, is making further inroads into the ETF market. Not long after passing the $1 billion assets milestone in April 2023, the widely followed active manager launched a suite of new products on June 15. The active ETFs are run by experienced portfolio managers, including one by David Giroux. Giroux oversees the $50 billion T. Rowe Price Capital Appreciation (PRWCX) mutual fund.  

PRWCX earned a five-star rating from Morningstar. The fund’s consistent relative record adds to its appeal. The fund was in the top quartile of its mixed-asset peer group in eight of the last ten calendar years. It was in the top third in the remaining two. Giroux has run the fund for the last 16 years and is one of the most well-known active managers in the industry. 

This Is Not a Clone Strategy by T. Rowe Price 

The newly launched T. Rowe Price Capital Appreciation Equity ETF (TCAF) is not a clone strategy of PRCWX. Giroux’s mutual fund uses a blend of equities and fixed income securities, but TCAF will only own equities and nearly double the number found in PRWCX.  

According to the ETF’s prospectus, TCAF will own approximately 100 stocks. These are the ones Giroux and team believe have experienced and capable management; strong risk-adjusted return potential; leading or improving market position; and attractive relative valuation. The ETF will likely focus on high-quality companies trading at attractive valuations. 

What’s Likely Inside TCAF

The ETF is taking a broader approach to security selection than the equity sleeve of the mutual fund. We expect TCAF to be more diversified, less volatile, and have a lower turnover approach. A more patient style is particularly important as TCAF will disclose its holdings daily.

The Capital Appreciation approach used by the mutual fund currently favors industries like healthcare and information technology stocks. For example, as of the end of April, PRWCX had top-10 positions in Apple, Becton Dickinson, Danaher, Microsoft, and UnitedHealth Group. According to company documents, AbbVie, Becton Dickinson, and UnitedHealth Group were among the major purchases of the fund in the first quarter.

PRWCX Has Been Closed to New Investors 

For advisors who are fans of PRWCX, the new TCAF ETF should be a welcome addition to the active ETF world. PRWCX has been closed to new investors due to capacity constraints for years. Additionally, the mutual fund has, in the past, paid out capital gains to shareholders. In 2022, a combined $2.34 per share in combined short- and long-term gains were incurred. In general, ETFs tend to be more tax efficient than mutual funds due to the creation and redemption process. 

Given his track record, we expect that there will be significant demand for an equity-only strategy from David Giroux. For advisors who believe in active management and for those who have conviction in active management and want access through an ETF, TCAF is certainly one to consider. 

A link to the TCAF product page can be found Here.

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