JPMorgan Ultra-Short Income ETF JPST

Experienced, liquidity-focused managers, along with considerable supporting resources earn, JPMorgan Ultra-Short Income ETF JPST a People upgrade as one of the category’s best.

Team, depth, stability, and strong decisions make this tenured team stand out from rivals, earning it a People upgrade to High from Above Average. J.P. Morgan’s global liquidity platform offers this team the tools and resources to make effective and thoughtful decisions across traditional cash markets and bonds that mature beyond one year.

Manager James McNerny has helmed this offering since its May 2017 inception and leads this strategy day to day. He joined J.P. Morgan in 2000 and focuses exclusively on short-term strategies. This collaborative effort includes three seasoned comanagers, David Martucci, Cecilia Junker, and Kyongsoo Noh, who average more than 25 years of industry experience. The comanagers also draw on the vast resources of the firm’s global fixed-income and currency and commodities platforms, including 21 investment-grade corporate bond and eight securitized analysts who inform security selection.

A time-tested process emphasizes bottom-up security selection but also takes its cues from the firm’s macro forecast. Relative value assessments between traditional cash markets and debt maturing beyond one year, and the outlook for liquidity drive portfolio positioning. This helps the team beat prime money market funds while limiting potential losses and maintaining ample liquidity. The exchange-traded fund's conservative approach builds on the firm’s long history of managing ultrashort and liquidity strategies for institutions. Duration stays less than one year, but it fluctuated between a fourth and three fourths of a year recently. Investment-grade corporate bonds and securitized debt receive the most focus, despite these sectors’ absence from the strategy’s ICE BofA 3-Month US Treasury Bill Index.

This conservative approach has helped the strategy hold up better than peers in down markets. Despite the absence of below-investment-grade debt, which features as 5% of the portfolio of the average ultrashort bond peer, the ETF’s performance since its May 2017 inception is compelling. Over this period, the strategy’s 2.4% annualized gain through May 2024 beat its distinct ultrashort bond Morningstar Category peer median’s 2.2%, ranking near the top quartile; its top-decile volatility-adjusted performance, as measured by Sharpe ratio, was even better. The strategy’s downside protection was on display in 2022, when rates spiked following the beginning of the Russia-Ukraine war and in March 2020’s pandemic-driven volatility.

The ETF’s competitive 18-basis-point expense ratio is one of the category’s lowest.

Although this ETF was only launched in 2017, J.P. Morgan has honed its conservative approach over multiple decades managing ultrashort and liquidity strategies for institutional clients. The strategy is typical in its marriage of top-down views with bottom-up security selection, yet its approach relies on active decision-making and strikes a balance between traditional cash markets and longer-term bonds to set this strategy apart from most ultrashort peers that don’t draw on dedicated liquidity specialists.

The team’s monthly macro forecast drives the six-month outlook and informs duration, sector, and liquidity positioning. The comanagers then dynamically adjust yield curve and duration, a measure of interest-rate sensitivity, which is typically shorter than one year. Investment-grade, corporate-backed, and securitized debt receive the most focus despite these sectors’ absence from the ICE BofA 3-Month US Treasury Bill Index. Higher issuance and short-term financing needs for financials make these companies a prominent fixture in the portfolio, normally between 20% and 50% of assets (not including commercial paper). J.P. Morgan’s sizable investment-grade credit analyst team vets each holding and assigns it an internal rating.

Liquidity is paramount. The strategy typically holds more than half of its assets in securities that mature in less than one year; this stake includes cash, money markets, certificates of deposit, and commercial paper.

High-quality corporate-backed bonds are the focus of the strategy, while securitized debt and Treasuries round out the portfolio. Commercial paper and certificates of deposit have constituted between 65% and 90% of assets and stood near 70% in March 2024. The strategy’s Treasury-only benchmark doesn’t guide portfolio construction, instead the managers opt for higher-yielding securities, resulting in a yield advantage versus its index and near that of its typical peer. Yet, lead manager James McNerny and team don’t reach for yield in non-investment-grade debt but instead focus almost exclusively on investment-grade securities. In contrast, the average ultrashort peer featured about 5% of assets in junk-rated and nonrated paper as of March 2024. Ample liquidity is visible in the strategy’s allocation to bonds with less than a year to maturity; March 2024’s portfolio featured 63.4% of assets in this bucket, down from 78.8% a year prior.

The managers move duration more than most peers to reflect their macro outlook and relative value along the front-end yield curve: Duration is typically shorter than one year and has been as short as 0.25 years. For example, the team shortened duration to 0.26 years in 2022’s third quarter from 0.86 years in mid-2021 amid aggressive Federal Reserve rate hikes. They repositioned longer to 0.85 years in March 2023 in anticipation of a US recession and the potential for Fed rate hikes; however, as this did not emerge, duration was shortened to about a half year in 2024’s first quarter.

James McNerny takes the lead here and has helmed this offering since its May 2017 inception. This is a team effort, though, with support of a seasoned group of cash and ultrashort specialists who reside within J.P. Morgan’s global liquidity platform. Three comanagers that bring more than 25 years’ average industry experience sit alongside McNerny: David Martucci, head of managed reserves portfolio management, Cecilia Junker, and Kyongsoo Noh.

McNerny sets the tone here and leads the day-to-day management of the ETF, and the strategy’s collaborative approach relies on inputs from the comanagers to determine duration, yield curve, sector allocation, security selection, and liquidity positioning. In addition to the firm’s dedicated liquidity team, the managers draw on the broad resources of its vast global fixed income, currency and commodities platform, which includes 21 investment-grade corporate bond and eight securitized analysts. Stability is also key here. The team has worked together for more than 10 years, and apart from some turnover among fundamental analyst ranks, nobody material to the strategy has left in recent years.

The comanagers share in the ETF’s performance. McNerny has a personal stake between $100,001 and $500,000, Martucci and Junker have between $10,001 and $50,000, while Noh has none.

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.

Since the ETF’s May 2017 inception, its 2.4% annualized gain through May 2024 beat its distinct ultrashort bond Morningstar Category median peer’s 2.2%, ranking near the top quartile. The strategy’s top-decile volatility-adjusted performance, as measured by Sharpe ratio, was even better.

This downside protection was on display in 2022 when rates spiked following the beginning of the Russia-Ukraine war. The ETF’s 0.37% first-quarter loss was less severe than its peer median’s 0.71% drop. As markets settled in, the ETF’s shorter duration fueled its 1.06% calendar-year gain, ahead of its typical rival by about 1 percentage point. The strategy’s conservative positioning also helped limit the downside during the pandemic-driven volatility in March 2020 when its 1.6% drawdown was less harsh than its average rival’s 1.8% loss.

The ETF may lag in periods favorable to credit risk, like in 2023. During the calendar year, the strategy’s 5.16% return trailed its peer median’s 5.76% but landed still ahead of the category’s Bloomberg Gov/Corp 1-Year Duration Index’s 4.12%. A conservative approach and avoidance of below-investment-grade debt did not keep up with peers that take more credit risk.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Silver.