Last week’s ETF Exchange conference saw active ETFs take center stage. Following years of major AUM growth and accelerating launches, more and more market watchers and investors are looking to active. Issuers are no exception, with longtime active ETF provider T. Rowe Price celebrating a recent launch, TTEQ, at the conference. T. Rowe Price’s Portfolio Manager Dom Rizzo took to the stage to talk about the active tech ETF’s approach and how it differs from other tech strategies.
See more: T. Rowe Price Launches New Active Tech ETF TTEQ
Hosted by Roxanna Islam, VettaFi’s head of sector & industry research, the “Under-the-Radar Thematic Trends” panel invited Rizzo to discuss the active tech ETF and the broad themes in which it invests.
Active Tech ETF TTEQ
The T. Rowe Price Technology ETF (TTEQ ) launched this past October and charges only 63 basis points (bps) to invest in technology. As he developed the fund, Rizzo explained, he identified two key issues with other tech ETFs. Many of those funds have issues with concentration; they are overexposed to a few names. At the same time, however, tech-heavy broad-based funds end up with names that don’t fit a real “tech” fund, with companies like Pepsi (PEP) or Marriot (MAR).
“We want to deliver to our clients, who are investing on behalf of their clients, the technology beta they want, with the alpha potential they seek on top,” Rizzo said. “So, what does that mean? That means delivering a portfolio that’s concentrated, yet diversified.”
TTEQ’s freedom to approach tech “responsibly” but within its framework, Rizzo said, empowers it to invest worldwide and across several themes. For example, amid some suggestions that the “Mag Seven” has become the “Lag Seven,” TTEQ can still seek for “alpha” amid those names.
A Key Theme
Rizzo noted that the fund is not solely invested in AI. As an active tech ETF, however, it does aim to invest in key aspects of the megatrend.
“I think AI has the potential to be the biggest productivity enhancer for the global economy since electricity,” Rizzo said. “Electricity added roughly 1% a year to global GDP growth for 32 years, right? […] I look at that 1% for 32 years number, and I actually think it’s relatively pedestrian compared to what AI can deliver.”
Of course, he noted, with every major productivity enhancing technology has come a bubble. From the railroad and telecom to China and Bitcoin, Rizzo said, investors have had to navigate bubbles. That’s where he sees the role of the active manager. The portfolio manager noted the diversity of the digital semiconductor ecosystem as a source of opportunities, with names from chip designers like Cadence Design Systems (CDNS) to manufacturers such as Taiwan Semiconductor (TSMC).
Active Tech ETF Investing: Disruptors vs. Legacy Names
Islam asked Rizzo to share his thoughts on whether the AI landscape is seeing legacy players emerge as the winners or the disruptors.
“This is the fundamental question, right?” Rizzo said. “Is AI a sustaining innovation, or is it a disruptive innovation? Does it make your business better, or is it going to actually disrupt you?"
Rizzo drew a contrast between Google (GOOGL) and Meta (META) to explain. Google may see AI as putting its search engine business at risk, he said. He noted the intimate knowledge AI Chat Bots gather about users as an advantage over search engines. Meta, on the other hand, has incorporated AI throughout its business, he said.
He further clarified the strategy’s approach with the example of AI’s impact on power use and generation. With power demand from chips and data centers rising significantly, an active tech ETF can find the truly disruptive opportunities.
“Every single major hyperscaler is attacking this problem by throwing more GPUs at the problem. This means more power consumption,” he explained. “If I ran a different strategy, would I look at things like the cooling companies or the power plants and stuff? Sure, but I don’t. I run the technology strategy, and my job is to deliver the technology beta you want with the alpha potential you seek. So how am I going to do that?”
“I think Infineon is a fascinating name right now. If you guys don’t know, it is the German power semiconductor company,” he added, noting the firm’s key role in EV semiconductor development. “If you think about my framework, Infineon sells lynchpin technology. That is the most important power semiconductor company in the world, innovating two incredible secular growth markets with improving fundamentals.”
One could consider an active tech ETF like TTEQ a satellite allocation, Rizzo said. It could, however, also play a more central role, given the importance of finding the best tech strategy available.
“Forty to forty-five percent of the S&P 500 is technology, so your most important decision as a capital allocator today is, what are you doing with your technology and technology-related stocks?” he said. “That’s the most important decision you’re making clients […] shouldn’t you have a responsible, thoughtful framework for investing in those stocks and try to generate alpha within those stocks?”
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