Disruptive investing has stood out in the stock market for years, driving significant growth in the S&P 500. Whether via Tesla (TSLA) pushing the envelope in electric vehicles or e-commerce names like Shopify (SHOP) challenging physical retailers, disruptive names have outperformed the disrupted. However, the disruptive investing regime may no longer surprise the market, according to research from T. Rowe Price. That could present an opportunity for active funds.
Innovation has caused significant disruption in those and other industries to benefit many investors. That disruption previously threw valuations for a loop, per insight from John Linehan, U.S. Equities CIO at T. Rowe Price. While disrupted firms appeared cheaper than their fundamentals, those prices often turned out to be more accurate than expected.
Markets may have underestimated the growth and profitability of new, innovative technologies and their impact on incumbent firms. That said, the incumbents could be ready to strike back, with disruptions no longer underestimated. The disrupted incumbents, instead, have the opportunity to outperform their valuations by adapting.
Consider, for example, electric vehicles. TSLA broke out and has become a leader in battery electric vehicles, Linehan notes. It had reaped profits and a much higher valuation than when it started. At the same time, investors have lower expectations for firms like Volkswagen (VWAPY), which has spent billions on battery EVs. Incumbent firms like VWAPY may be underrated, then, and worth navigating.
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High expectations for disruptive names, in turn, may cloud investors’ view of incumbents’ potential. Taken together, active ETFs can provide one way to take advantage of this discrepancy. Active managers bring a strong understanding of the fundamentals behind firms’ potential success. One strategy that can navigate this disruptive investing regime may be the T. Rowe Price Equity Income ETF (TEQI ).
TEQI actively invests in global large-cap firms undervalued based on factors like a low price-to-earnings ratio, above-average dividend yields, or a low stock price relative to fundamentals. TEQI charges 54 basis points and is set to hit its three-year milestone in August, returning 5.6% over the last three months.
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