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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).
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.