J.P. Morgan begins its push into ETFs

The firm's first-ever exchange-traded fund exploits the combined efforts of four factors.

Robert Goldsborough 21 June, 2014 | 12:29AM
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Earlier this week, J.P. Morgan Asset Management rolled out its first-ever exchange-traded fund in the United States, a passively managed global-equity-oriented strategic beta ETF that tracks an FTSE index and taps four separate return factors.

The new ETF, JPMorgan Diversified Return Global Equity ETF JPGE, is a strategic beta fund whose index weights stocks from around the world based on four factors: value, size, momentum and low volatility. Strategic beta funds have gained in popularity and are supported by academic research.

The new fund tracks the FTSE Developed Diversified Factor Index, a rules-based benchmark that J.P. Morgan Asset Management developed in conjunction with FTSE Group. The theory behind the new fund is that J.P. Morgan believes indexes that follow traditional market-cap weighting or that focus on single factors are biased toward equities that are overvalued. To that end, the index considers relative valuation, positive price momentum, low volatility and specific market capitalization, and also aims to equally diversify risk across global regions and industries. As a result, the index weights sectors fairly evenly, with weightings of between 7.5% and 13.0% for each sector.

As of May 30, 2014, the benchmark had 468 constituents. It's not clear yet--and J.P. Morgan Asset Management has not yet provided this information--how many securities the new fund holds. In the filing that J.P.Morgan issued in February when it proposed the ETF, the firm noted that the fund generally would not purchase all of the securities in the index. As of May 30, the index's top holdings were a host of global firms, including Samsung, Toyota Motor TM, CSL, Wesfarmers, Woolworths, Hyundai, BHP Billiton BHP and Hutchison Whampoa.

JPGE charges 0.38% after a fee waiver of 0.26%.

Although JPGE is J.P. Morgan's first ETF, it's by no means the first attempt by the broader entity, JPMorgan Chase JPM, to enter the world of exchange-traded products. Since 2009, the bank has backed an exchange-traded note, JPMorgan Alerian MLP Index ETN AMJ, which now has US$6.35 billion in assets. Officials at J.P. Morgan Asset Management have been considering creating ETFs for at least the past four years and previously had filed with U.S. regulators to create a physical copper ETF. Although the U.S. Securities and Exchange Commission (SEC) in 2013 gave the thumbs-up to proposed physical copper ETFs from J.P. Morgan and BlackRock, plans for J.P. Morgan's fund stalled amid declines in copper prices and litigation from copper industry participants, who were fearful that such a product would ultimately mean copper shortages in certain favoured locations. On top of all that, the bank decided to put its physical commodities business up for sale, signaling a lack of interest in proceeding.

J.P. Morgan officials have made clear that the company's upcoming efforts in ETFs mainly are for an active ETF lineup that would effectively be an adjunct to its lineup of U.S.-sold mutual funds. Even so, the bank in February did file for a total of three passively managed, strategic beta ETFs, one of which wound up being JPGE. The other two proposed funds, JPMorgan Diversified Return International Ex-North America Equity ETF and JPMorgan Diversified Return Emerging Markets Equity ETF, remain in registration with the SEC.

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Robert Goldsborough

Robert Goldsborough  Robert Goldsborough is an analyst covering equity strategies on Morningstar’s manager research team.

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