To The Moon

Summary

• T. Rowe Price Blue Chip Growth ETF has impressive YTD returns of 30.9% and is in the top decile of growth funds. However, 3-year returns are weak.
• TCHP is a non-transparent ETF that only discloses holdings quarterly, with a concentrated bet on 'Magnificent 7' stocks.
• Compared to the 'boom-bust' nature of TCHP's returns, I prefer the steadier SPGP ETF that combines growth and value investing into a single 'GARP' fund.

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I came across the T. Rowe Price Blue Chip Growth ETF (NYSEARCA:TCHP) while screening for funds with strong short-term returns. The TCHP fund has an impressive YTD return of 30.9% to October 31, 2023, placing it in the top decile of broad growth funds tracked by Morningstar.

While TCHP's short-term returns are impressive, I am concerned with the fund's 'boom-bust' returns profile, as it also declined by 38% in 2022. Instead of the TCHP, I prefer the steadier performance of the Invesco S&P 500 GARP ETF (SPGP) for my growth-equity allocation.

I rate the TCHP ETF a hold.

Fund Overview

The T. Rowe Price Blue Chip Growth ETF is an active non-transparent ETF that seeks long-term capital growth by investing in large and medium-sized blue-chip companies with leading market positions, seasoned management, and strong financial fundamentals.

Non-transparent ETFs are actively managed ETFs that do not disclose their holdings on a daily basis. This helps the fund manager protect their intellectual property and helps the funds avoid being 'front run' or copied by other investors. Non-transparent ETFs are a recent phenomenon that only began appearing in 2020 after security regulators approved their creation.

Although non-transparent ETFs have benefits for their managers, they may also create additional risks for their investors. For example, without the daily transparency of the portfolio's holdings, the TCHP ETF may trade at wider premium/discount spreads compared to other ETFs. In the past year, the TCHP ETF has traded at premium/discounts to NAV of as wide as 0.2%, compared to regular ETFs like the SPDR S&P 500 ETF Trust (SPY) with premiums/discounts measured in single digit basis points (Figure 1).

Figure 1 - TCHP has a relatively wide premium/discount to NAV (troweprice.com)

The TCHP ETF has $439 million in assets and charges a 0.57% gross expense ratio (Figure 2).

Figure 2 - TCHP fund details (troweprice.com)

Portfolio Holdings

As a non-transparent ETF, the TCHP ETF only disclose its holdings on a quarterly basis with a delay. Figure 3 shows the TCHP ETF's sector allocation as of September 30, 2023. The TCHP ETF's largest sector weight is Technology at 42.1%, followed by Communications at 16.2% and Consumer Cyclicals at 14.9%.

Figure 3 - TCHP sector allocation (morningstar.com)

The TCHP ETF is a very concentrated fund, with its top 10 positions accounting for 65.4% of the portfolio (Figure 4). TCHP's top 10 holdings are heavily represented by recent market darlings, the 'Magnificent 7'. Only Tesla (TSLA) is missing from this list, and is replaced by another market darling, Eli Lilly (LLY), with its claim to fame being its GLP1 weight loss drug, Mounjaro.

Figure 4 - TCHP top 10 holdings (troweprice.com)

Distribution & Yield

The TCHP ETF does not currently pay a distribution.

Returns

Figure 5 shows the historical returns of the TCHP ETF. Readers should note that the TCHP ETF has a limited operating history, with an inception date of August 4, 2020.

Figure 5 - TCHP historical returns (morningstar.com)

Despite strong YTD returns of 30.9% to October 31, 2023, TCHP's 3 year average annual total return is fairly weak at only 2.4%. This is because the TCHP ETF had a horrific 2022, declining by 37.9%.

Although the TCHP ETF does not have a long operating history, a similar growth strategy managed by the same manager, the T. Rowe Price Blue Chip Growth Fund No Load (TRBCX), has been in operation since 1993 (Figure 6).

Figure 6 - TRBCX historical returns (morningstar.com)

The TRBCX fund is a giant mutual fund with $49.8 billion in assets and holds essentially the same securities as TCHP (Figure 7). So essentially, the TCHP ETF is the TRBCX fund ported into an ETF wrapper.

Figure 7 - TRBCX top 10 holdings (troweprice.com)

We can study TRBCX's historical returns to get a sense of the long-term performance of the Blue Chip Growth strategy. The TRBCX mutual fund has delivered 3/5/10/15 Yr average annual returns of 1.4%/9.3%/11.7%/14.2% respectively to October 31, 2023.

Comparing the TRBCX fund against the SPY ETF and the iShares Russell 1000 Growth ETF (IWF), we can see that the TRBCX fund has outperformed SPY and IWF by a slight margin, with a 7.8% CAGR compared to a 7.2% CAGR for SPY and a 7.5% CAGR for IWF, measured from January 2001 to October 2023 (Figure 8).

Figure 8 - TRBCX has outperformed SPY and IWF (Author created with Portfolio Visualizer)

However, the T. Rowe Price Blue Chip Growth fund also has higher volatility, so its Sharpe ratio is the same as the SPY ETF.

TCHP/TRBCX vs. SPGP

Overall, the TCHP/TRBCX is a decent growth-oriented fund with solid long-term performance. However, I am concerned with the fund's 'boom-bust' returns profile and believe my current growth-oriented pick, the Invesco S&P 500 GARP ETF, has superior long-term performance.

The SPGP ETF combines growth and value investing strategies into a 'GARP' fund. Although SPGP does not have TCHP's impressive 1 year returns, it also did not lose nearly as much money in 2022. So compared to TRBCX, it is actually much farther ahead overall in terms of CAGR returns (Figure 9. Readers should note that prior to February 25, 2019, SPGP tracked a different strategy and is not comparable to its current 'GARP' mandate).

Figure 9 - SPGP vs. TRBCX (Author created with Portfolio Visualizer)

While maximizing returns during 'risk-on' periods like TCHP has done in 2023 is important, playing defense and minimizing losses during bear markets like 2022 is the true key to long-term outperformance.

I wrote about the SPGP ETF here.

Conclusion

The T. Rowe Price Blue Chip Growth ETF is an actively managed ETF that is based on the long-running T. Rowe Price Blue Chip Growth Fund. Recent returns for the TCHP ETF has been strong, as the fund holds big weights in the 'Magnificent 7' group of stocks. However, the fund also performed poorly in 2022 when growth stocks were out of favour.

Overall, the TCHP ETF's underlying Blue Chip Growth strategy has outperformed the S&P 500 over the long-run, but its 'boom-bust' returns profile makes me hesitant to recommend it.

For my personal growth-equity allocation, I prefer the Invesco S&P 500 GARP ETF that combines tenets of both growth and value investing. The SPGP ETF has outperformed the Blue Chip Growth strategy in recent years by minimizing portfolio losses during the 2022 bear market.

I rate the TCHP ETF a hold.