T. Rowe Price Group (TROW -2.50%) has been the rare asset manager that's thrived over the past decade with a primary focus on active management. Generally, active managers struggled to gain assets during the 2010s bull market as investors favored cheaper index and exchange-traded funds (ETFs) that posted strong returns. But T. Rowe Price was able to succeed with superior performance and great operational efficiency.
In these volatile times, T. Rowe Price's stock-picking prowess should continue to provide great value for investors coming out of the recession. But now T. Rowe is bringing that active management expertise to ETFs, as the company introduced four actively managed ETFs this past summer after years of seeking approval from the Securities and Exchange (SEC).
These ETFs have some key differences from others. The question that investors may be wondering is, how will they compete in a crowded marketplace?
Trust the process?
In late 2019, the SEC gave the go-ahead to four money managers that had petitioned to create actively managed ETFs. T. Rowe Price was one of them, along with Fidelity, Natixis, and Blue Tractor. In July 2020, T. Rowe Price rolled out its first four ETFs: the Blue Chip Growth, Dividend Growth, Equity Income, and Growth Stock ETFs.
As mentioned, these are not your typical typical ETFs, as they are actively managed by the portfolio managers who run the corresponding mutual funds. So instead of tracking an index, or a portion of an index, these ETFs will have portfolios selected by the managers, with the intraday trading, real-time pricing, tax efficiency, and other benefits that ETFs provide. A key difference is that the T. Rowe Price has to only disclose its holdings once a quarter, as opposed to every day like a traditional ETF.
This means T. Rowe Price doesn't have to reveal its stock-picking strategies on a daily basis, but for investors it means that they don't have the same transparency they do in other ETFs.
T. Rowe Price is counting on the notion that investors will "trust the process," so to speak, based on its track record of beating the indexes with the mutual funds. Over the last 10 years, 85% of its equity funds and 90% of its multi-asset funds have outperformed the Morningstar median. Further, 65% of its equity funds and 92% of its multi-asset funds have topped the passive peer median over the last 10 years.
If you build it, will they come?
The question for T. Rowe Price is: How will the market respond to these new products? So far, the inflows have been solid. The Blue Chip Growth ETF, for example, has had $38 million in net inflows over the past three months, which is good compared to its competitors over that period. It has been by far their most popular ETF thus far. The expense ratio is considerably higher than some of the index options at 0.57%. The SPDR S&P 500 ETF, by comparison, has an expense ratio of just 0.09%.
It is too early to know the answer to that question just yet, but if these new active ETFs prove to be successful, it could provide a huge boost for T. Rowe Price. The question investors will be looking to answer is: Is the outperformance over the index ETFs worth the extra expense? T. Rowe has a great track record as a stock picker and could very well end up being the leader in active ETFs, but time will tell.
T. Rowe Price has a lot going for it, with a pristine balance sheet with virtually no debt and great performance. The stock has been up 23% over the past 12 months and is up 3.5% to date. Plus,it is a Dividend Aristocrat, with 33 straight years of dividend increases and a solid dividend yield of 2.3%.
Because of its capital strength, T. Rowe Price is in a great position to invest in these new ETFs, and the company plans to introduce many more over time. If these ETFs are successful, and lead to a robust line of active ETFs, an already good stock could become even better.