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Much has been made about active mutual fund issuers converting some of their product lineups to the exchange traded funds wrapper. Advisors and clients should expect that trend to continue.
In somewhat similar moves, some fund companies will, rather than engage in a mutual-fund-to-ETF conversion, roll out ETF equivalents of popular actively managed mutual funds. Count familiar name T. Rowe Price among the fund giants following that playbook. The Maryland-based asset manager was a late entrant to the ETF space, but it now has an admirable $1.54 billion (and growing) assets under management thanks in large part to offering ETF equivalents of mutual funds, some of which have lengthy track records and broad followings in the advisors community.
One of the new additions to that lot is the T. Rowe Price Capital Appreciation Equity ETF TCAF, managed by David Giroux. TCAF debuted in June.
“The fund invests primarily in large U.S. companies believed to have above average potential for long-term growth due to favorable traits ranging from capable management and strong risk-adjusted return potential to leading or improving market position or proprietary advantages,” according to the issuer.
Talking TCAF
TCAF already has nearly $126 million in assets under management – a fast start for any new ETF and ont that confirms advisors are familiar with Giroux’s track record. That includes his stewardship of the T. Rowe Price Capital Appreciation PRWCX, which dates back to 2006.
Fund managers aren’t infallible. Nor are the issuers behind them, but PRCWX’s legacy is clearly helping TCAF’s get off to a solid start.
“Giroux’s track record on T. Rowe Price Capital Appreciation has no rivals. The multi-asset fund managed to beat all moderate-allocation peers over his tenure through July 2023,” according to Morningstar research. “The fund’s success can be attributed to several factors, but the reason the ETF is getting so much attention (it has grown to roughly $125 million in assets in just seven weeks) is that the mutual fund’s stock portfolio has consistently outpaced its S&P 500 benchmark (the same benchmark the ETF will seek to beat).”
When it came to market, TCAF had 100 holdings , according to issuer data. In other words, it’s more a high-conviction fund than broad market strategy. That’s alright.
“To pick stocks, Giroux cuts down the S&P 500 to roughly 125 companies, excluding those he believes have serious flaws such as excessive valuations, poor capital allocation, meager earnings growth, or poor management teams, among others,” adds Morningstar. “From there, he invests in the companies that he feels sit at the best valuations and hold the strongest risk-adjusted return profiles. That tends to fit the style of growth at a reasonable price, resulting in a portfolio that may oscillate between a value, blend, or growth orientation over time.”
The ETF came to market overweight healthcare and utilities stocks relative to the S&P 500 and slightly underweight tech compared to that index.
TCAF Tidbits
The new T. Rowe Price ETF charges 0.31% per year, or $31 on a $10,000 stake, which is decent among actively managed large-cap strategies.
Other steps are being taken to minimize total cost of ownership, including holding some names for longer-than-average and keeping dividend yield low to reduce capital gains distributions.
“To reduce capital gains, the ETF is expected to trade in and out of names less often and have longer holding periods on average. The ETF’s annual turnover ratio is expected to be around 10%, significantly lower than the roughly 50% average for the mutual fund’s equity sleeve,” concludes Morningstar.
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