Among the many newly launched "active" exchange-traded funds (ETFs), observe the number of stocks it holds. Most traditional active fund managers typically only want to own the best investment ideas from their analysts.
According to most views, the actively managed exchange-traded fund market has experienced explosive growth in recent years. However, a deeper analysis reveals that the situation is not as simple as it appears on the surface.
According to the latest report from Morningstar, among 1,619 actively managed ETFs, 82% were launched after 2020. In contrast, 29% of index-tracking ETFs were launched in the same period. However, many of these ETFs are not considered "active" by traditional mutual fund investors. About a quarter of the $773 billion in active ETF assets is managed by Dimensional Fund Advisors and Avantis Investments, which employ what are called "systematic strategies," making slight but significant active adjustments to fundamentally index-like strategies.
For example, the popular $34 billion Dimensional U.S. Core Equity 2 ETF (ticker: DFAC) is actively managed, but according to Morningstar data, it has 2,664 stocks in its portfolio. While it does make factor adjustments like value tilting to a certain extent, its returns will be highly correlated with that of Vanguard's Total Market Index Fund (VTI).
Currently, there is a lack of ETFs that are manager-led and have analyst teams conducting in-depth research on individual companies. Unfortunately, Morningstar currently lacks screening tools to exclude systematic strategies to specifically identify such traditional stock-picking funds. However, there are still a few funds that can be found. One method is to filter by reputation. Companies like T. Rowe Price, Fidelity, Capital Group, Franklin Resources, and JPMorgan are known for their stock-picking capabilities and offer similar ETFs.
You can also check the number of stocks held by the ETF. Most traditional active management managers typically only want to own the best investment ideas from their analysts, rather than hundreds or thousands of stocks selected by quantitative screening. For example, the T. Rowe Price Capital Appreciation Equity ETF (TCAF), which launched last June, typically holds 100 stocks. It is managed by top active manager David Giroux. His $6.7 billion T. Rowe Price Capital Appreciation (PRWCX) mutual fund has outperformed 99% of its peers in the moderate allocation fund category over the past 15 years, and this mutual fund is currently closed to new investors. The ETF only invests in stocks, while the mutual fund also includes bonds.
Although Giroux's ETF has a lower trading frequency than mutual funds, he indicates that it is still a very active fund, reflected not only in the stocks it holds but also in those it does not: "Sometimes, the stocks you don't hold can be more impactful on performance than the stocks you do hold." Giroux pays particular attention to a company's capital allocation—strategic spending, dividends, stock buybacks, and acquisitions. The fund's analysts also focus on forward-looking research that delves into information beyond the existing data of the companies, which is often inaccessible to quantitative active fund analysts.
Therefore, even though the fund holds some index components like Microsoft (MSFT.O) and NVIDIA (NVDA.O), it still has significant overweights in seemingly boring utility stocks—such as Ameren, CenterPoint Energy, NiSource, and Exelon, with an overweight ratio of 7.4%, far exceeding the S&P 500's 2.5%. Giroux recognized early on that utility companies are crucial in providing the additional power required for AI systems.
The Putnam Focused Large Cap Value ETF (PVAL) holds only 44 stocks, with a style similar to TCAF. Caroline Edwards, the portfolio manager for senior clients at Putnam, states, "Our main source of alpha comes from our large team of analysts who provide differentiated forward-looking views on stocks." Putnam's management team has more than 30 analysts providing stock research, and these efforts have paid off. The fund's annualized return over the past three years is 15%, surpassing 99% of its large value fund peers and significantly outperforming its benchmark.
Article reposted from: Jin10 Data