ETF Trends CEO Tom Lydon discussed the T. Rowe Price Equity Income ETF (TEQI) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
TEQI Invests at least 80% of its net 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. For more information regarding the risks of the Fund, see the risk section below.
With equity markets at record highs, investors can consider an active investment approach to add value to a diversified portfolio.
Investing in an Ongoing Bull Market
It is important to acknowledge that a large uptick in earnings during 2021 is already somewhat priced into equity prices. Long-term growth in earnings and cash flow drive stockholder returns. Sustainable double-digit earnings and cash flow growth are rare and are often underappreciated by the market, with only 1 in 3 companies growing sustainably at 10%+ and only 1 in 5 companies growing sustainably at 15%+.
Capitalizing on differences between cyclical and secular growth is essential to successful growth investing. Robust fundamental research is key to identifying long-term winners. A strong management team and thoughtful capital allocation have historically been able to combine to exploit secular trends and bridge cyclical difficulty. Consequently, investors may find that active management could be critical to investing on the right side of change.
Dividends can as an alternative income stream in a lower-for-longer yield environment. For TEQI, the ETF typically focuses on value stocks with above-average yields. Low-interest rates – the scenario income investors are contending with today – are usually seen as beneficial to high-dividend names.
Another point in favor of TEQI is that inflation is conducive to the upside for higher-yielding stocks. Inflation may be hurting the broader market, but it also indicates that stocks paying high dividends can perform well. Dividend growth historically tops inflation. That’s an important point for investors considering TEQI because many passive funds are one or the other: dedicated to payout growth or above-average dividends.
Some companies with big yields are financially burdened by those payouts and primed for cuts and suspensions. Active funds can avoid those names, while index strategies often wait to boot offenders.
Globally, payouts are expected to increase this year following a rough 2020. Some recent forecasts suggest markets may underestimating the extent to which domestic payouts grow this year and in 2022.
Semi-transparent active ETFs keep the same roles and workflow as transparent ETFs but provide different information to ensure efficient trading. Specifically, the T. Rowe Price Active ETFs come with a type of “proxy basket” where an Authorized Participant 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 leverage the benefits of the ETF structure while still maintaining their established investment process to protect trading information and existing shareholders. The active ETF process not make any major changes to the existing ETF ecosystem. 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.
Listen to the full podcast episode on TEQI:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.