Four months into the year, but for many investors, it may feel like it’s been longer. Tariff uncertainty has taken a big bite out of the markets. Indeed, the S&P 500 has dropped by more than 10% YTD. That has brought the one-year performance for the key market index down to just 2.5% for the last twelve months. Following such a strong overall market return in 2024, investors may then be looking to active ETFs. While many are familiar with actives’ merits, it’s important to revisit the main reason one would use them in such uncertainty.
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Active ETFs provide plenty of flexibility and adaptability, but perhaps most important is their scrutiny of fundamental attributes. Fundamental metrics can help indicate whether a company can prove durable despite market turmoil.
New T. Rowe Price analysis emphasizes that point, looking to “high-quality, durable compounder companies” that can build wealth year after year even in uncertainty. So, what kind of attributes do active managers look for with such an approach?
For example, the piece points to factors like strong franchise quality, recurring revenues, and consistent operational cash flows. Other attributes include relatively low leverage, pricing power, and high returns on invested capital. Active ETFs can do more to scrutinize firms for factors that might identify them as those “durable compounders.”
“Importantly, durable compounders have historically tended to perform relatively well during economic downturns, given their more predictable and steady operational cash flows,” wrote Justin White, T. Rowe Price portfolio manager. “Profits have tended to be less sensitive to economic conditions and so may provide more consistent performance in times of uncertainty.”
The firm offers active ETFs like the T. Rowe Price Capital Appreciation Equity Fund (TCAF) which could intrigue. Managed by David Giroux, the fund provides the close scrutiny that can help identify those durable names.
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