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T. Rowe Price Capital Appreciation Premium Income and Hedged Equity ETFs in registration
Think TRP is trying to sell more of their products via the ETFs route. My hesitation is their above average fees they charged comparing to those from Capital/American funds. I understand these are actively managed but this asset class is expanding quickly and TRP needs to be competitive.
A side note, the Capital Appreciation Premium Income has additional investment mandates including the use of derivatives and call option while the Capital Appreciation and Income fund does not. There are also 4 additional co-managers in addition to D. Giroux and F. Shuggi. So I think the ETF may differ.
FYI, Vanguard patent on ETF expired in 2023 and other companies can issue ETFs as separate class (not as clones) of their mutual funds, which I would watch out for.
I have to reread the registration doc to see if Hedge equity is a clone or a different class of PHEFX - I am interested in this ETF.
Vanguard’s patent is for index funds only, where the portfolio turnover is low. Long term performance between the two is very close.
Actively managed ETFs are quite different animals and post challenge to replicate the identical stock and bond holdings and their respective %. T. Rowe Price Capital Appreciation Premium Income ETF would be an interesting one to follow.
Though there were no actively managed ETFs at the time the patent was issued, that doesn't mean that the patent is necessarily limited to index funds. The patent claims (11 and 12) cover both index and actively managed funds.
Although there is no requirement that they do so, ETSs issued to date track stock indices, such as the S&P 500 Index or the Nasdaq 100 Index. ...
The investment company could have an investment objective of tracking a specific target index of Securities or the investment company could be actively managed by an investment advisor. ...
[Claim] 11: The method of claim 1 wherein the single investment company has an investment objective of tracking a specific benchmark index of securities.
[Claim] 12. The method of claim 1 wherein the single investment company is actively managed by an investment advisor.
What @msf noted is my understanding too - that VG patent covered the ETF classes of mutual funds, active or passive. It just so happened that VG wasn't big on active ETFs, so used it for passive funds only. Now that the VG patent has expired, other companies are applying for ETF classes of active or passive funds.
"Long term performance between the two [ETF and the mutual fund classes] is very close."
In the spirit of sharing info (division of labor) -
It is not the performance tracking one is concerned about. Any cap gains triggered by either class is allocated to both classes, somewhat defeating the general ETF process that otherwise allows to minimize cap gain triggering.
I had unusual amount of cap gains distributed from my Vanguard patented ETF.
If this Bogleheads post is credible, that ETF likely was VIGI / VIAAX.
As an illustration of how well ETFs can avoid capital gains, Vanguard has had only three years in which its diversified stock ETFs distributed a gain.
Vanguard FTSE All-World Ex-US Small-Cap distributed small capital gains in 2009-2010, its first two years. It started near the 2009 market bottom and doubled in its first year, so it didn't have many stocks with losses to sell to meet index changes.
Vanguard International Dividend Achievers Index distributed a 6% capital gain in 2021, when it changed indexes and was thus forced to sell a lot of stock.
Among sector funds, Vanguard Consumer Staples ETF distributed a gain in 2004, its first year, and REIT Index has frequently distributed gains.
There's always the risk of a portfolio overhaul, whether an actively managed fund has a manager change or an index fund changes target indexes (or worse, its objective). The patented structure of VIGI is immaterial here. Outside of 2021, it has never made a cap gain distribution, long or short.
MOAT has good amount of turnover and I do not recall it ever having a cap gain distribution.
I have owned all sorts of ETFs over the past 20+ years and have a good comprehension of the situations when cap gain distributions are a possibility. I will never knowingly buy an ETF which is a different class of a mutual fund in a taxable account. I never owned an equity mutual fund in my taxable account(s).
MOAT has good amount of turnover and I do not recall it ever having a cap gain distribution
The implication being that significant turnover such as that caused by a change in index being tracked does not necessarily result in an ETF recognizing cap gains. It is true that ETFs can handle large periodic portfolio rebalancings (e.g. due to index reconstitution) as described below. But changing indexes is not a periodic, routine event.
If the OEF/ETF structure of VIGI were a cause of the large cap gain distribution in 2021, then would one not expect some cap gains, however small, to have been realized in the other nine years the fund has been around? Further, the probability that the sole year any cap gains were recognized would randomly coincide with the sole year that the index fund was changed is just 10%.
What does turnover even mean for an ETF? Probably not what one thinks. It's certainly not what I would have thought - the value of portfolio shares sold (or bought) divided by the average AUM. Rather, turnover counts only those shares bought or sold for cash.
Turnover rate excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including Vanguard ETF Creation Units.
So we may be comparing apples and oranges in saying that MOAT and VIGI turnovers are comparable. Though the real issue is not the turnover rate per se, but the anomalously high rate that VIGI experienced in 2021 (1.5x - 3x its normal rate).
ETFs put a "heartbeat" mechanism in place to handle routine changes in portfolio composition (rebalancings). Even the large quarterly reconstitutions that MOAT has to deal with.
In a "heartbeat" trade, the APs buy the securities that the ETF must discard (due to rebalancing). A couple of days later they sell the new securities that the ETF needs. All done with in-kind trades, using ETF shares as "currency".
One might ask why the SEC lets ETFs get away with this sort of blatant tax manipulation.
Recognizing the potential benefits to ETFs and their shareholders of employing custom baskets, but also being cognizant of the potential for abuses, the SEC now permits virtually unfettered use of custom baskets. However, ETFs using these custom baskets must adopt and implement detailed written procedures that “set forth detailed parameters for the construction and acceptance of custom baskets that are in the best interest of the [ETF] and its shareholders . . . .” These written procedures are internal, non-public documents. Rule 6c-11 also permits ETFs to do heartbeat trades with non-APs on the day of a reorganization, merger, conversion, or liquidation.
In short, evidence that OEF/ETF structure causes cap gains is lacking (virtually no gains recognized across decades and scores of funds), ETF turnover isn't what one thinks so use is judiciously, and ETFs work with APs to handle periodic portfolio rebalancings (including reconstitutions).
Since he is in the chair of the Advidisory Committe, he is ultimately responsible for managing the day to day managment,
From the original registration filing:
T. Rowe Price has established an Investment Advisory Committee with respect to the fund. The committee chair is ultimately responsible for the day-to-day management of the fund’s portfolio and works with the committee in developing and executing the fund’s investment program. The members of the committee are as follows: David R. Giroux, chair, Justin Eric Olsen, Vivek Rajeswaran, Farris G. Shuggi, Mike Signore, and Brian Solomon. The following information provides the year that the chair first joined the Firm and the chair’s specific business experience during the past five years (although the chair may have had portfolio management responsibilities for a longer period). Mr. Giroux has been chair of the committee since the fund’s inception. He joined the Firm in 1998, and his investment experience dates from that time. He has served as a portfolio manager with the Firm throughout the past five years. Messrs. Olsen, Rajeswaran, Shuggi, Signore, and Solomon have been co-portfolio managers of the fund since its inception. Mr. Olsen joined the Firm in 2014, and his investment experience dates from 2013. During the past five years, he was a member of the Quantitative team in the Fixed Income Division and has served as an associate portfolio manager (beginning in 2021). Mr. Rajeswaran joined the Firm in 2012, and his investment experience dates from that time. During the past five years, he was an analyst in the U.S. Equity Division and served as an associate portfolio manager (beginning in 2023). Mr. Shuggi joined the Firm in 2008, and his investment experience dates from that time. During the past five years, he has served as a portfolio manager (beginning in 2016), prior to becoming head of quantitative equity. Mr. Signore joined the Firm in 2015, returning in 2020, and his investment experience dates from 2010. During the past five years, he was an analyst in the U.S. Equity Division and has served as an associate portfolio manager (beginning in 2023). Mr. Solomon joined the Firm in 2015 and his investment experiences dates from that time. During the past five years, he was an analyst in the U.S. Equity Division and has served as an associate portfolio manager (beginning in 2023). The Statement of Additional Information (SAI) provides additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of the fund’s shares.
Thank you for the additional information. There are five co-managers on this ETF and D. Giroux is the lead manager. Farris G. Shuggi, is also the co-manager on the Capital Appreciation & Incone fund. Will wait for more details to be released?
I view prospectuses as notorious for obfuscation, aiming at ambiguity and saying as little as possible. Are there really five co-managers here? If so, then how many co-managers are there on PRWCX? Its prospectus has nearly identical wording aside from the names of the putative co-managers:
T. Rowe Price has established an Investment Advisory Committee with respect to the fund. The committee chair is ultimately responsible for the day-to-day management of the fund’s portfolio and works with the committee in developing and executing the fund’s investment program. The members of the committee are as follows: David R. Giroux, chair, Paul Cho, Donald J. Easley, Matthew Frustaci, Steven D. Krichbaum, Kevin Patrick Loome, Simon Paterson, Sal Rais, Vivek Rajeswaran, Farris G. Shuggi, Mike Signore, Brian Solomon, Matthew Stevenson, Chen Tian, Jon Davis Wood, and Ashley R. Woodruff.
In contrast, Giroux and Shuggi are listed as equal co-managers of PRCFX in the Management section of the prospectus. Later, in the "More About the Fund" section, one finds the committee verbiage:
T. Rowe Price has established an Investment Advisory Committee with respect to the fund. The committee cochairs are ultimately responsible for the day-to-day management of the fund’s portfolio and work with the committee in developing and executing the fund’s investment program. The members of the committee are as follows: David R. Giroux and Farris G. Shuggi, cochairs, Paul Cho, Gregg Gola, Kevin Klassen, Steven D. Krichbaum, Chase Lancaster, Amanda Ludwitzke, Jordan M. McKinnie, Justin Eric Olsen, Vivek Rajeswaran, Nikhil Shah, Mike Signore, Latika Signorelli, Brian Solomon, Matthew Stevenson, Chen Tian, Tamara P. Wiggs, and Jon Davis Wood.
If PRCFX has but two day-to-day managers, and if Giroux is the manager of PRWCX, then Giroux is also the sole manager of this new ETF. Conversely, if this ETF has five managers, then PRWCX has 16 and PRCFX has 19 (if I've counted correctly).
As to AUM, M* reports Giroux manages ten funds, including variable annuity portfolios. PRCFX is the only one where there is a co-chair listed. He is sole manager (depending on how one defines "manager") of the other nine funds. Total AUM is just under $100B, per M* and Financial Times current data.
Capital Appreciation Premium Income ETF is different from the existing funds, at least if one can glean anything from prospectus tea leaves. Its objective is "to provide regular distributions while aiming for capital preservation with potential for capital appreciation." Most of Giroux' funds' objectives are capital appreciation (or capital growth) only.
Arguably Penn Mutual's Flexibly Managed Fund comes closer to this ETF with its objective "to seek to maximize total return (capital appreciation and income)." But investing for total return is not the same as investing for income.
Further, only Capital Appreciation Premium Income explicitly calls out stock dividends as a component of its investment strategy. "Specifically, the fund seeks to provide regular distributions that may consist of dividends and cash from the covered call option premiums." This sounds more like an equity-income fund with a covered call overlay than a typical Giroux fund.
Still, Flexibly Managed Fund is permitted "to a limited extent" to write covered calls "primarily in an effort to protect against downside risk or to generate additional income"
Then again, it's all tea leaves and slideware at this point.
It's ironic that OEF fund companies rolling out active/transparent ETF variants of their existing funds often end up saving some of their 'secret sauce' for the relatively non-transparent OEFs ... which may end up making them a more attractive vehicle for the long-term. (Future MFO article?) Either that or they are using it to justify the difference in ERs between OEFs and ETFs?
I do worry about Giroux getting stretched too thin ... or else they're name-dropping him on funds to add a 'wow' factor to them. But then again, while I could be wrong, I suspect PRWCX will always be "his baby" and receive most of his attention/genius/ideas.
"Although Giroux has been the main attraction, he’s not on his own running this strategy. Three experienced associate portfolio managers provide support and cover about 30 stocks each. Two analysts also recently joined the team to help with its growing workload as it recently launched an active equity exchange-traded fund, T. Rowe Price Capital Appreciation Equity, and an income-focused multi-asset fund in conjunction with the firm’s quantitative equity team."
Aside from small or boutique funds, portfolio managers are often assisted by research analysts. That's understood. So adding support may be little more than that - adding two analysts and three others with PM experience doing what could be analyst work, following specific stocks.
M* doesn't name anyone as a co-manager on PRWCX. Nor does T. Rowe Price - here's its fund page with only one manager's mug shot.
Contrast what M* wrote about PRWCX with what it wrote about FCNTX. Like Giroux, Danoff gets lots of help from analysts. But M* and Fidelity are clear that he has true co-manager assistance on some of his funds but not on others. Notably he solos on FCNTX.
Danoff leverages the research of Fidelity's well-regarded and deep analyst bench, but he isn't overly dependent on it, either. ...
Danoff's heavy asset load magnifies key-person risk and makes capacity a concern. Danoff has said he's not ready to retire anytime soon and collaborates with other of the firm's portfolio managers to keep up with the market. Nidhi Gupta--a seasoned tech and communication-services analyst but a newcomer to diversified portfolio management--comanages Fidelity Advisor New Insights FINSX with Danoff. Jean Park, the veteran portfolio manager of mid-growth fund Fidelity Growth Strategies FDEGX, comanages Fidelity VIP Contrafund.
M* lists Gupta as a manager on FINSX's people page. Fidelity recently replaced Jean Park on VIP Contra but M* notes elsewhere (subscription required) that she had run a 40% sleeve of VIP Contra.
Comments
T. Rowe Price Hedged Equity ETF
I am guessing from a quick look at the registration doc, these two are potentially clones of the existing mutual funds.
A side note, the Capital Appreciation Premium Income has additional investment mandates including the use of derivatives and call option while the Capital Appreciation and Income fund does not. There are also 4 additional co-managers in addition to D. Giroux and F. Shuggi. So I think the ETF may differ.
FYI, Vanguard patent on ETF expired in 2023 and other companies can issue ETFs as separate class (not as clones) of their mutual funds, which I would watch out for.
I have to reread the registration doc to see if Hedge equity is a clone or a different class of PHEFX - I am interested in this ETF.
Actively managed ETFs are quite different animals and post challenge to replicate the identical stock and bond holdings and their respective %. T. Rowe Price Capital Appreciation Premium Income ETF would be an interesting one to follow.
Though there were no actively managed ETFs at the time the patent was issued, that doesn't mean that the patent is necessarily limited to index funds. The patent claims (11 and 12) cover both index and actively managed funds. https://patentimages.storage.googleapis.com/0f/19/44/3755859e82d295/US6879964.pdf
Now that the VG patent has expired, other companies are applying for ETF classes of active or passive funds.
In the spirit of sharing info (division of labor) -
It is not the performance tracking one is concerned about. Any cap gains triggered by either class is allocated to both classes, somewhat defeating the general ETF process that otherwise allows to minimize cap gain triggering.
I had unusual amount of cap gains distributed from my Vanguard patented ETF.
There's always the risk of a portfolio overhaul, whether an actively managed fund has a manager change or an index fund changes target indexes (or worse, its objective). The patented structure of VIGI is immaterial here. Outside of 2021, it has never made a cap gain distribution, long or short.
https://advisors.vanguard.com/investments/products/vigi/vanguard-international-dividend-appreciation-etf#priceanddistributions
I have owned all sorts of ETFs over the past 20+ years and have a good comprehension of the situations when cap gain distributions are a possibility. I will never knowingly buy an ETF which is a different class of a mutual fund in a taxable account. I never owned an equity mutual fund in my taxable account(s).
The implication being that significant turnover such as that caused by a change in index being tracked does not necessarily result in an ETF recognizing cap gains. It is true that ETFs can handle large periodic portfolio rebalancings (e.g. due to index reconstitution) as described below. But changing indexes is not a periodic, routine event.
If the OEF/ETF structure of VIGI were a cause of the large cap gain distribution in 2021, then would one not expect some cap gains, however small, to have been realized in the other nine years the fund has been around? Further, the probability that the sole year any cap gains were recognized would randomly coincide with the sole year that the index fund was changed is just 10%.
What does turnover even mean for an ETF? Probably not what one thinks. It's certainly not what I would have thought - the value of portfolio shares sold (or bought) divided by the average AUM. Rather, turnover counts only those shares bought or sold for cash. https://institutional.vanguard.com/investments/product-details/fund/4415
So we may be comparing apples and oranges in saying that MOAT and VIGI turnovers are comparable. Though the real issue is not the turnover rate per se, but the anomalously high rate that VIGI experienced in 2021 (1.5x - 3x its normal rate).
ETFs put a "heartbeat" mechanism in place to handle routine changes in portfolio composition (rebalancings). Even the large quarterly reconstitutions that MOAT has to deal with.
In a "heartbeat" trade, the APs buy the securities that the ETF must discard (due to rebalancing). A couple of days later they sell the new securities that the ETF needs. All done with in-kind trades, using ETF shares as "currency".
The audacity of these maneuvers is so great that Elisabeth Kashner used MOAT as a case study when she coined the term "heartbeat" trades for ETFs in 2017.
https://insight.factset.com/the-heartbeat-of-etf-tax-efficiency
One might ask what's in it for the APs. It turns out that they can make a nice, reliable profit for this service (on the order of 24 basis pts/year). At the (hidden) expense of the shareholders.
https://insight.factset.com/the-heartbeat-of-etf-tax-efficiency-part-three-trade-forensics
One might ask why the SEC lets ETFs get away with this sort of blatant tax manipulation. Jeffrey M Colon, Unplugging Heartbeat Trades and Reforming the Taxation of ETFs, University of Chicago Business Law Review, Vol 2.1 (2022?), Section VII.
https://businesslawreview.uchicago.edu/print-archive/unplugging-heartbeat-trades-and-reforming-taxation-etfs#heading-6
In short, evidence that OEF/ETF structure causes cap gains is lacking (virtually no gains recognized across decades and scores of funds), ETF turnover isn't what one thinks so use is judiciously, and ETFs work with APs to handle periodic portfolio rebalancings (including reconstitutions).
[Investment Objective(s)
The fund seeks to provide regular distributions while aiming for capital preservation with potential for capital appreciation.
Principal Investment Strategies
The fund normally invests in equities and implements a covered call options strategy to achieve its investment objective.]
is a competitor to
JPMorgan Equity Premium Income ETF JEPI, which tends to carry more of a value oriented portfolio.
I have stopped counting, but pray, tell, how many funds can this one man possibly "manage"?
Just curious, but does the word "manage" still have any meaning in this context?
From the original registration filing:
T. Rowe Price has established an Investment Advisory Committee with respect to the fund. The committee chair is ultimately responsible for the day-to-day management of the fund’s portfolio and works with the committee in developing and executing the fund’s investment program. The members of the committee are as follows: David R. Giroux, chair, Justin Eric Olsen, Vivek Rajeswaran, Farris G. Shuggi, Mike Signore, and Brian Solomon. The following information provides the year that the chair first joined the Firm and the chair’s specific business experience during the past five years (although the chair may have had portfolio management responsibilities for a longer period). Mr. Giroux has been chair of the committee since the fund’s inception. He joined the Firm in 1998, and his investment experience dates from that time. He has served as a portfolio manager with the Firm throughout the past five years. Messrs. Olsen, Rajeswaran, Shuggi, Signore, and Solomon have been co-portfolio managers of the fund since its inception. Mr. Olsen joined the Firm in 2014, and his investment experience dates from 2013. During the past five years, he was a member of the Quantitative team in the Fixed Income Division and has served as an associate portfolio manager (beginning in 2021). Mr. Rajeswaran joined the Firm in 2012, and his investment experience dates from that time. During the past five years, he was an analyst in the U.S. Equity Division and served as an associate portfolio manager (beginning in 2023). Mr. Shuggi joined the Firm in 2008, and his investment experience dates from that time. During the past five years, he has served as a portfolio manager (beginning in 2016), prior to becoming head of quantitative equity. Mr. Signore joined the Firm in 2015, returning in 2020, and his investment experience dates from 2010. During the past five years, he was an analyst in the U.S. Equity Division and has served as an associate portfolio manager (beginning in 2023). Mr. Solomon joined the Firm in 2015 and his investment experiences dates from that time. During the past five years, he was an analyst in the U.S. Equity Division and has served as an associate portfolio manager (beginning in 2023). The Statement of Additional Information (SAI) provides additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers, and the portfolio managers’ ownership of the fund’s shares.
In contrast, Giroux and Shuggi are listed as equal co-managers of PRCFX in the Management section of the prospectus. Later, in the "More About the Fund" section, one finds the committee verbiage: https://prospectus-express.broadridge.com/summary.asp?doctype=pros&clientid=trowepll&fundid=77954M402
If PRCFX has but two day-to-day managers, and if Giroux is the manager of PRWCX, then Giroux is also the sole manager of this new ETF. Conversely, if this ETF has five managers, then PRWCX has 16 and PRCFX has 19 (if I've counted correctly).
As to AUM, M* reports Giroux manages ten funds, including variable annuity portfolios. PRCFX is the only one where there is a co-chair listed. He is sole manager (depending on how one defines "manager") of the other nine funds. Total AUM is just under $100B, per M* and Financial Times current data.
Capital Appreciation Premium Income ETF is different from the existing funds, at least if one can glean anything from prospectus tea leaves. Its objective is "to provide regular distributions while aiming for capital preservation with potential for capital appreciation." Most of Giroux' funds' objectives are capital appreciation (or capital growth) only.
Arguably Penn Mutual's Flexibly Managed Fund comes closer to this ETF with its objective "to seek to maximize total return (capital appreciation and income)." But investing for total return is not the same as investing for income.
Further, only Capital Appreciation Premium Income explicitly calls out stock dividends as a component of its investment strategy. "Specifically, the fund seeks to provide regular distributions that may consist of dividends and cash from the covered call option premiums." This sounds more like an equity-income fund with a covered call overlay than a typical Giroux fund.
Still, Flexibly Managed Fund is permitted "to a limited extent" to write covered calls "primarily in an effort to protect against downside risk or to generate additional income"
Then again, it's all tea leaves and slideware at this point.
Next question is the management fee for this ETF, and there will be a sliding scale based on the AUM.
I do worry about Giroux getting stretched too thin ... or else they're name-dropping him on funds to add a 'wow' factor to them. But then again, while I could be wrong, I suspect PRWCX will always be "his baby" and receive most of his attention/genius/ideas.
"Although Giroux has been the main attraction, he’s not on his own running this strategy.
Three experienced associate portfolio managers provide support and cover about 30 stocks each.
Two analysts also recently joined the team to help with its growing workload as it recently launched
an active equity exchange-traded fund, T. Rowe Price Capital Appreciation Equity,
and an income-focused multi-asset fund in conjunction with the firm’s quantitative equity team."
M* doesn't name anyone as a co-manager on PRWCX. Nor does T. Rowe Price - here's its fund page with only one manager's mug shot.
Contrast what M* wrote about PRWCX with what it wrote about FCNTX. Like Giroux, Danoff gets lots of help from analysts. But M* and Fidelity are clear that he has true co-manager assistance on some of his funds but not on others. Notably he solos on FCNTX. https://www.morningstar.com/funds/fidelity-contrafund-continues-impress
M* lists Gupta as a manager on FINSX's people page. Fidelity recently replaced Jean Park on VIP Contra but M* notes elsewhere (subscription required) that she had run a 40% sleeve of VIP Contra.
I am interested in the Hedge Equity ETF so I can move PHEFX out of my IRA.
Edit: The draft prospectus is dated Jan 17, 2025