Actively managed exchange traded funds can help investors beat passive indexing without taking on unnecessary risk.
In the recent webcast, Strong Earnings, Strong Markets – Why Now’s the Time for Active Management, Ken Uematsu, Associate Portfolio Manager, T. Rowe Price, highlighted the underlying strategy of the T. Rowe Price U.S. Equity Research ETF (TSPA) as a better approach to active core investing for investors to enhance returns and minimize risks in today’s market.
When compared to passive indexing, the U.S. Structured Research Equity Strategy has the potential to consistently outperform S&P 500, offers relative downside risk mitigation, seeks to exploit pricing inefficiencies at market troughs, seeks to avoid secular losers, invests outside benchmark, offers potential to generate alpha beyond benchmarks, integrates ESG considerations, and has the ability to incorporate client restrictions, Uematsu explained.
“We believe our U.S. Structured Research Equity Strategy approach to core exposure offers competitive advantages over passive strategies,” Uematsu said.
The U.S. Structured Research Equity Strategy advantages include a fundamental bottom-up approach to stock selection; focused industry specialists who make, buy, and sell decisions; extensive U.S. small-/mid-cap and non-U.S. research and portfolio management resources that complement large-cap investing activities; and risk management and portfolio oversight designed to isolate stock selection skills.
The U.S. Structured Research Equity Strategy is a core equity strategy benchmarked against the S&P 500 Index, with a goal of consistent outperformance with benchmark volatility and characteristics. The T. Rowe Price industry analysts make, buy, and sell decisions, utilizing a straightforward methodology to help manage risk. The strategy has a sector-neutral and style-neutral portfolio structure.
“Stock selection drives alpha — portfolio construction rules facilitate effective risk management process,” Uematsu said.
The methodology has generated a long-term performance advantage. The U.S. Structured Research Equity Strategy has historically added relative value around index changes. Securities deleted from the S&P 500 index often underperformed prior to deletion and securities added to the index often outperformed prior to addition, which allowed the active managers to exploit this market inefficiency.
Over the long-term, in the 45 past up-market quarters, the average quarterly value added for the U.S. Structured Research Equity Strategy compared to the S&P 500 Index was 14 basis points. Meanwhile, over the past 15 down-market quarters, the average quarterly value added was 13 basis points compared to the S&P 500. The result was a consistent value added over time.
“U.S. Structured Research Equity Strategy has added long-term value over the S&P 500, consistent with our objective,” Uematsu said.
Passive strategies are inflexible and must own all benchmark securities until they are removed from the index. On the other hand, the U.S. Structured Research Equity Strategy provides flexibility and expertise to potentially avoid secular losers and overweight secular winners, own stocks prior to index inclusion and capture potential outperformance, and potentially avoid or sell stocks before they decline while passive strategies must hold on.
The active managers are comprised of a team of industry specialists managing their own sub-portfolios focused on their area of expertise. They implement tight risk controls designed to isolate stock selection and avoid unintended sector or style tilts, with a high level oversight of the analysts, risk, and performance.
Financial advisors who are interested in learning more about an active approach to investing can watch the webcast here on demand.