By Lewis Braham
By most accounts, the actively managed exchange-traded-fund market has exploded in recent years. But if you look beneath the surface, things aren't quite as they appear.
According to a recent Morningstar report, of the 1,619 actively managed ETFs available, 82% were listed since 2020. By comparison, 29% of index-tracking ETFs were listed during that period. Yet many of these ETFs aren't what traditional mutual fund investors would consider active. About a fourth of the $773 billion assets in active ETFs are managed by Dimensional Fund Advisors and Avantis Investments, which run so-called "systematic strategies" that employ small but important active tweaks to what are basically indexed strategies.
The popular $34 billion Dimensional U.S. Core Equity 2 ETF (ticker: DFAC) is active, but it holds 2,664 stocks in its portfolio, according to Morningstar. While it makes some modest value and other factor tilts, its returns will be significantly correlated to total-market index funds like Vanguard Total Stock Market $(VTI.AU)$.
What is largely absent are ETFs with managers who employ teams of analysts doing deep research of individual companies. Unfortunately, Morningstar doesn't have a screening tool yet to eliminate systematic strategies and find such traditional stockpickers. Still, there are a handful. One way to find them is by reputation. Shops like T. Rowe Price, Fidelity, Capital Group, Franklin Resources, and J.P. Morgan are well known for their stock-picking mutual funds and offer similar ETFs.
You can also look at the number of stocks that an ETF holds. Most old-school active managers typically want to own only their analysts' best ideas instead of hundreds of stocks selected by a quantitative screen. The T. Rowe Price Capital Appreciation Equity ETF (TCAF), which launched in June of last year, typically holds 100 stocks. It's run by one of the best active managers, David Giroux. His older $67 billion mutual fund T. Rowe Price Capital Appreciation (PRWCX), which is closed to new investors, has beaten 99% of its peers in Morningstar's Moderate Allocation fund category in the past 15 years. The ETF is a stock-only fund while the mutual fund also owns bonds.
Although Giroux trades the ETF's holdings less than the mutual fund's, it's very much an active fund, he says, not only by what it holds, but what it doesn't hold: "Sometimes the stocks you don't own are more important to performance than the ones you do." Giroux is particularly focused on companies' capital allocation -- their strategic spending decisions, dividends, share repurchases, and acquisitions. The fund's analysts are also forward looking in their on-the-ground research, finding information out about companies that isn't available in backward-looking data that quantitatively run active funds analyze.
That is why even though the fund holds some index mainstays, such as Microsoft and Nvidia, it also has a significant overweight -- 7.4% versus the S&P 500's 2.5% -- in nominally boring utilities such as Ameren, CenterPoint Energy, NiSource, and Exelon. Giroux was early in understanding how vital utilities would be in generating the added power necessary to run artificial-intelligence systems.
The Putnam Focused Large Cap Value ETF (PVAL), which holds only 44 stocks, has a similar traditional style. "Our main source of alpha [or risk-adjusted outperformance] is our big analyst team that's coming up with differentiated forward-looking views on stocks," says Caroline Edwards, a senior client portfolio manager with the fund. Putnam's management has access to over 30 analysts for its stock research, and their diligence has paid off. The fund's 15% three-year annualized return beats 99% of its Large Value fund category peers and its benchmark by a wide margin.
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December 04, 2024 03:00 ET (08:00 GMT)
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