Active ETFs have caught the investment world by storm as investors have realized the benefits of active management within the ETF wrapper. Asset managers have been quick to satiate investor demand with plenty of new funds. This includes venerable asset manager T. Rowe Price, which has quickly built out a suite of top active ETFs that have amassed over $1 billion in assets.
However, T. Rowe Price’s latest active launch follows a different vein.
It turns out, T. Rowe is using a different structure for its latest round of active ETFs. While the changes may not matter to some investors, it’s a big deal and, ultimately, underscores that transparency is preferred.
T. Rowe Adds to Its Suite of Active ETFs
With over $1.3 trillion in assets, investment manager T. Rowe Price is no small fry in the industry. The firm was founded back in the 1920s by its namesake and created the concept of growth-at-a-reasonable-price, or GARP investing. Since then, the firm has become a retirement plan staple and has grown its asset base.
This includes a lineup of ETFs.
Back in 2020, T. Rowe Price launched a series of ten ETFs – five equity and five fixed income funds. The ETFs were actively managed and were modeled after some of the firm’s successful mutual funds. For example, the T. Rowe Price Dividend Growth ETF is run by the same manager under the same strategy as the T. Rowe Price Dividend Growth Mutual Fund. The same could be said for the T. Rowe Price Equity Income ETF and T. Rowe Price Blue Chip Growth ETF. This allowed investors to pick and choose which structure would suit them the best, avoid potential capital gains, and provide more choice for its investors.
Overall, those ten funds in T. Rowe Price’s lineup have amassed over $1 billion in assets.
Continuing with its launch plans are five new ETFs that are all actively managed and have expense ratios between 0.31% and 0.55%. 1
T. Rowe Price's New Fully Transparent ETFs
| Ticker | Name | AUM | Exp Ratio |
|---|---|---|---|
| TCAF | T Rowe Price Capital Appreciation Equity ETF | $122M | 0.31% |
| TVAL | T. Rowe Price Value ETF | $14.5M | 0.33% |
| TGRT | T. Rowe Price Growth ETF | $14.5M | 0.38% |
| TMSL | T. Rowe Price Small‑Mid Cap ETF | $17.3M | 0.55% |
| TOUS | T Rowe Price International Equity ETF | $60M | 0.50% |
A Big Difference
The interesting difference between the launches comes down to structure. Active ETFs come in different flavors.
The vast bulk of ETFs are built using rules under the Investment Company Act of 1940. This means they are structured very similarly to mutual funds. Under those rules, the SEC has granted some exceptions for ETFs, which allow them to function. This includes the ability to only sell shares to large authorized participants (APs) rather than directly to investors, which creates a secondary market we all participate in. Another big difference and exception comes down to disclosure.
Because ETFs trade throughout the day, they must be required to list their holdings daily. That’s not such a big deal for an S&P 500 index fund, but, for an active manager, letting the world see their secret recipe it is. Other investors can now copy it or front-run the holdings.
With these concerns, the SEC has granted relief from the Investment Company Act of 1940 for several different ETF structures that allow for semi-transparent reporting of holdings – quarterly, just like mutual funds. T. Rowe Price was one of the first asset managers to embrace the semi-transparent structure and its first five equity ETFs used it. However, the new funds use fully transparent structures.
So, why the change? It might have to do with investor preference.
While fund managers may like semi-transparent ETFs, investors like to know what they are buying. So do market makers. As a whole, many semi-transparent active ETFs have failed to gain assets till now, and many trade at dislocations to their net asset values (NAVs). You can even see that among fund issuers themselves.
For example, American Century also embraced the semi-transparent structure when it first became available. All in all, the firm has about $2.5 billion across its 18 ETFs. Not bad, but considering that its Avantis brand of active ETFs, which use transparent structures, has more than $25 billion, a different picture emerges. Moreover, many of the largest ETF issuers – J.P. Morgan, BlackRock and State Street – have used transparent structures for their new active ETFs. Even the famed Ark Innovation ETF uses a transparent structure.
Investors have clearly chosen with their wallets. T. Rowe Price may just be following the sign of the times. T. Rowe has been successful on the ETF front. Nonetheless, $1 billion is small potatoes considering its massive asset base. At the same time, the bulk of those assets are located in just a few of its ETFs.
Transparent Could be the Way to Go
It will be interesting to see if the new transparent ETFs gather more assets than their semi-transparent offerings over the long haul. Overall, investors seem to crave the clarity and NAV-hugging that transparent ETFs can offer. While there are still some holdouts to the structure, I bet more will continue to go transparent and give investors what they want.
T. Rowe Price Active ETFs
| Ticker | Name | AUM | YTD Total Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| TCHP | T Rowe Price Blue Chip Growth ETF | $377M | 33.32% | 0.57% | ETF | Yes |
| TGRW | T Rowe Price Growth Stock ETF | $52.9M | 33.27% | 0.52% | ETF | Yes |
| TFLR | T Rowe Price Floating Rate ETF | $54.5M | 7.42% | 0.6% | ETF | Yes |
| TDVG | T Rowe Price Dividend Growth ETF | $335.2M | 5.56% | 0.5% | ETF | Yes |
| THYF | T Rowe Price US High Yield ETF | $33.1M | 5.09% | 0.56% | ETF | Yes |
| TBUX | T Rowe Price Ultra Short-Term Bond ETF | $111.2M | 3.62% | 0.17% | ETF | Yes |
| TOTR | T Rowe Price Total Return ETF | $103.5M | 1.06% | 0.31% | ETF | Yes |
| TEQI | T Rowe Price Equity Income ETF | $128.8M | 0.95% | 0.54% | ETF | Yes |
The Bottom Line
T. Rowe Price has had success with its active ETFs. Now, it could be giving investors what they really want in transparent funds. By switching styles, the issuer should gain assets and help drive more attention to its quality fund lineup.
1 T. Rowe Price (July 2023). Revving Up New Investment Vehicles for Our Clients