Mutual fund giant T. Rowe Price joined the exchange-traded fund party last August when it launched four semi-transparent, actively managed equity ETFs, and today it added a fifth fund to its lineup with the debut of the T. Rowe Price U.S. Equity Research ETF (TSPA).
As with the company’s existing ETFs, this new product is based on the same strategy, portfolio and management team of a corresponding mutual fund—in this case, the U.S. Equity Research Fund (PRCOX).
That mutual fund has been a strong performer with assets under management of $7.6 billion and an enviable long-term track record that puts it in the top quartile versus its large-blend category during the three-, five-, 10- and 15-year periods, according to Morningstar.
The mutual fund charges a fee of 0.45%. The comparable ETF’s net expense ratio is 0.34%. The portfolio management team for both funds includes Ann Holcomb, Josh Nelson and Jason Polun, who are all part of the firm’s North America equities research team.
Like its mutual fund counterpart, the U.S. Equity Research ETF will invest mainly in large-cap stocks, and companies are evaluated based on the quality of their business franchise, earnings growth potential and stock valuation.
Using the mutual fund as a guide, this particular strategy’s top sector weight allocation is information technology, at roughly 25%. That’s followed by financials, healthcare and consumer discretionary, all of which are in the 12% range. Top holdings include tech titans Microsoft, Apple and Alphabet, along with Visa, Bank of America and Berkshire Hathaway.
As with all T. Rowe Price ETFs that share the same strategies and management teams with a corresponding mutual fund, that doesn’t mean people should expect the exact same investment returns. For example, the T. Rowe Price Growth Stock ETF (TGRW) has returned 6.1% year to date, while the T. Rowe Price Growth Stock (PRGFX) mutual fund is up 8.6% during that time.
“You could see some differences on the return profile, but that’s limited,” said Tim Coyne, head of ETFs at T. Rowe Price. “That’s because the mutual fund might be able to hold a broader palette of security types.”
Specifically, ETFs are limited to holding listed securities, whereas mutual funds can hold private placements that potentially can add juice to a portfolio.
All told, T. Rowe Price’s four existing ETFs have gathered $288 million in assets. Coyne noted the company is pleased with the products’ market reception to date, and it’s neither caught up with the AUM numbers per se nor worried about cannibalizing its corresponding mutual funds because it views its ETF strategy as a long-term initiative to expand its customer base.
“Many investors have a preference for ETFs over mutual funds, and this provides us with an opportunity to open a new pathway for investors to reach T. Rowe Price,” Coyne said.
T. Rowe Price is part of a growing trend of large asset managers that are rolling out actively managed equity ETFs that mirror existing mutual fund strategies and employ semi-transparent structures that don’t disclose portfolio holdings and weightings on a daily basis.
T. Rowe Price’s structure uses a proxy comprising a basket of securities and cash that’s designed to closely track the daily performance of a particular fund’s portfolio. In addition to the proxy portfolio, each business day before the start of trading the fund will publish the portfolio overlap, tracking error and the deviation between the proxy and the fund’s net asset value on a daily and rolling one-year basis. The company’s ETFs disclose their full portfolios quarterly, with a 15-day lag.