T. Rowe Price has a long-standing track record as an active asset manager across mutual funds. What led to the decision to enter the active ETF market in late 2020?

We have long realized that ETFs were growing in popularity due to their tax efficiency, low-cost structure, and convenience. Over the last several years, we have expanded our vehicle offerings to respond to changing client preferences so that we can continue to meet investors where they are. Our focus has remained on improving investment outcomes for our clients and then packaging our capabilities in various ways so that investors can choose what works best for them.

What slowed our entry into the ETF market, however, was the requirement that an issuer fully disclose its holdings each day as a condition for regulatory approval. The thought was that ETF market makers needed daily holdings disclosure to facilitate orderly markets. We are certainly in favor of orderly markets, but the downside of full daily disclosure for a large active manager like T. Rowe Price is that this information can be used to front-run our trading strategies, which could increase our transaction costs and ultimately hurt our clients’ performance. So, we worked with market makers and designed a model that would provide the information they need to facilitate efficient markets while still protecting our intellectual property (IP). After several years of constructive dialogue with the SEC, we gained approval to launch our ETFs in a format that would deliver the benefits of the ETF vehicle and T. Rowe Price active management to our clients, while protecting the returns that we work so hard to generate for them.

Your approach to market entry included the launch of equity ETFs that are similar to legacy mutual funds. What was the rationale for this approach and what additional considerations did this bring?

Yes, we wanted to bring forward some of our well-known, longstanding investment strategies as ETFs. Our first four ETFs were constructed similarly to flagship strategies with large retail followings run by well-tenured portfolio managers with impressive performance track records. These strategies were also frequently requested in conversations we had with our clients about our entry into the ETF space. Over time, we are building a robust suite of ETF offerings across regions and asset classes. While we continue to evaluate other existing investment strategies that would be appealing as ETFs, we are also contemplating new strategies designed for the ETF user.

Finally, we are appreciative of the continued partnership with the SEC as we design ETF processes that protect the IP of active investment strategies. While current approvals largely allow for domestic equity strategies, we are hoping in time to expand the allowable securities list so that investors can access more investment strategies in the active ETF wrapper.

The T. Rowe suite of ETFs recently surpassed $275 million in assets. What are your early observations on the trading and adoption of the products? What plans and hurdles do you see on the horizon?

Results since our ETF launch have been encouraging and we are excited by the traction we are seeing in our products. Our spreads have been the tightest in the industry among the new active ETF models. Spreads are an important data point to monitor because they not only reflect the confidence a market maker has in the ETF process, but they are also essentially a part of the cost of ownership for an investor. Our liquidity providers have done a great job supporting our ETFs in market and we, in turn, have continued to build tools and surveillance to ensure our investors can transact at appropriate levels.

We’ve seen broad acceptance of our ETFs, not only from existing clients, but also from investors new to T. Rowe Price. Interest has been particularly strong among advisors, independents, and the large trading platforms.

For some of our other clients, a certain amount of time in market is required, but the trading performance we have exhibited thus far as well as our investment performance track record should position us well when these firms are ready. We know it is still early in our ETF journey, but we are committed to building on our tradition of innovation for the benefit of our clients.

What guidance would you provide sponsors as they consider expanding their product offer to include actively managed ETFs (either fully transparent or semi-transparent)?

ETFs live outside the walls of the issuer, which is different than other investment vehicles. As an issuer, you want to build resilient products that require an ecosystem of support, including a listing exchange. Ideally, you want a listing exchange that understands your products, will foster an environment of liquidity and will assist with regulatory and other matters as you build your business. You will want dedicated liquidity partners that will help you grow from launch to fully scaled products. A custodian/administrator is also important, particularly for ETF operational functions that will be new to an issuer.

Equally important to the external ecosystem is building effective internal processes, which requires patience, conviction, collaboration, and coordination. We believed it was important to develop a focused ETF strategy within the firm, though we recognized it would take a lot of work. Building our business not only benefits our existing client base but also provides a future path of growth for our firm.