JPMorgan BetaBuilders US Aggt Bond ETF BBAG

The portfolio maintains a cost advantage over competitors, priced within the lowest fee quintile among peers.

The strategy merits an Above Average Process Pillar rating. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Above Average Parent Pillar rating. People, Process and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

The portfolio holds fixed-rate, taxable, investment-grade US bonds with at least one year until maturity. Qualifying bonds must have at least$ 300 million in outstanding face value, with higher minimums for some securitized fare. The index is market-value-weighted and rebalances each month. This results in a conservative portfolio that limits return and yield potential but also caps risk.

The portfolio's conservative complexion mimics that of the taxable, US investment-grade bond market. US Treasuries account for almost 45% of the portfolio, with the rest mostly in agency mortgage-backed securities (27%) and corporate bonds (26%). These figures differ from the category average, which places greater emphasis on mortgages and other securitized fare at the expense of Treasuries. The fund also excludes high-yield debt. Some peers allocate as much as 5% of their portfolios to below-investment-grade bonds, further accentuating the fund's conservative bend relative to category peers.

Average effective duration has fluctuated in recent years. As an index fund, this strategy is beholden to the issuing activity of bond types prevalent in its benchmark. This means the issuing activity of US Treasuries largely determines the makeup of the portfolio. As the Federal Reserve cut rates to zero following the initial coronavirus-driven shock in early 2020, this fund scooped up the low-coupon, longer-maturity debt that flooded the market. This led to higher duration and lower coupons than most active peers. As the Fed hiked rates in the years since, the fund’s average effective duration fell alongside long-dated issuances. These moves mimic those of the category norm, but their magnitude is more pronounced given the fund’s slightly higher interest-rate sensitivity.

With less credit risk comes less reward, and the fund leaves yield on the table by focusing on US Treasuries and other highly rated debt. Its average coupon and 12-month yield consistently lag the category average, falling 58 and 36 basis points short of the category norm, respectively, as of February 2024. However, the current rate environment gives even the safest portfolios an appetizing yield. The fund’s SEC yield of 4.4% as of February 2024 is more than double what it was in early 2022.

Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a passively managed vehicle that tracks a particular index, Morningstar associates the Process Pillar rating assigned to that vehicle with the index concerned. Morningstar then maps the Process Pillar associated with a given index to any other uncovered passive strategies that track the same index. This ensures that the analyst’s view is leveraged whenever available and promotes consistency when analyzing passive vehicles associated with a given index.

There are four managers listed on the fund: Supreet Khandate, Naveen Kumar, Evan Olonoff, Jan Ho. Together, they manage a total of two strategies, with solid long-term prospects. The strategies average a Silver asset-weighted algorithmically-assigned average Morningstar Medalist Rating, indicating a position to deliver positive alpha relative to the category median in aggregate. The team has undergone a bout of turnover recently, with Eric Isenberg leaving within the last four months. Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process.

Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Narrowing in on the past three-year period, it trailed the category index, the Bloomberg Barclays US Aggregate Bond Index, by an annualized 15 basis points, but matched the category average. And more importantly, when looking across a longer horizon, the strategy's performance looks bleak. On a five-year basis, it lagged the index by an annualized 19 basis points.

Even when adjusting for risk, the fund is not favorable. The share class had a lower Sharpe ratio, a measure of risk-adjusted returns, than the index over the trailing five-year period. This subpar risk-adjusted performance has not resulted in higher volatility, as measured by their standard deviation, which is close to the benchmark. Finally, the share class proved itself ineffective as it was unable to generate alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

It is good practice to weigh them heavily in any investment evaluation. This fund lands in the cheapest quintile of its Morningstar Category. Its low expense ratio, considered jointly with the fund’s People, Process, and Parent Pillars, suggests that this share class should be able to deliver positive alpha versus the lesser of its median category peer or the category benchmark, leading to its Morningstar Medalist Rating of Silver.