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JPMorgan US Momentum Factor ETF JMOM

Quantitative rating as of
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Morningstar’s Analysis JMOM

Quantitative rating as of .

The Morningstar Quantitative Rating for funds is analogous to the rating our analyst might assign to the fund if they covered it.

Our analysts assign Gold ratings to strategies that they have the most conviction will outperform a relevant index, or most peers, over a market cycle.

Summary

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JPMorgan US Momentum Factor ETF’s strong process and parent firm underpin this strategy's Morningstar Quantitative Rating of Gold. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.

The strategy's effective investment philosophy supports a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and an underweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy is part of a first-rate parent, as shown by a high lineup success ratio and overall low fees. These attributes support its Above Average Parent Pillar rating. Finally, the team managing the passive strategy earns the strategy an Average People Pillar rating.

Process

| High |

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. JPMorgan US Momentum Factor ETF earns a High Process Pillar rating.

This strategy skews toward smaller, deeper value companies compared with its average peer in the Large Growth Morningstar Category. Examining additional factor exposure, the fund holds stocks with high trading volumes, which can act as buoys in market turbulence and are usually easier to buy and sell in most market environments. The strategy is also historically more exposed compared with Morningstar Category peers. This strategy also tilts in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity. Though it may trail peers during an economic boom, this orientation contributes to helping it weather periods of economic stress better. But when compared with category peers, the strategy historically has had less exposure. Additionally, this strategy has demonstrated a bias to high-momentum stocks. Momentum is based on the premise that market outperformers will continue to outperform, and the laggards will continue to lag. This means that managers are overweighting stocks currently on a winning streak. And the portfolio has more exposure than its Morningstar Category peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section.

The portfolio is overweight in industrials and energy relative to the average peer in its category by 4.9 and 3.6 percentage points in terms of assets, respectively. The sectors with low exposure compared to their category peers are communication services and technology, underweight the average by 6.5 and 5.5 percentage points of assets, respectively. The portfolio is positioned across 289 holdings and assets are more dispersed than peers in the category. In particular, 16.6% of the strategy's assets are concentrated in the top 10 fund holdings, as opposed to the typical peer's 48.0%.

People

| Average |

JPMorgan’s team is comparable to peers, resulting in an Average People Pillar rating. There’s a deep bench of five managers listed on the fund. Experience on the team is abundant, with 11 years of average portfolio management experience. Together, they manage a total of three strategies, with solid long-term prospects. The strategies average a Gold asset-weighted combined Morningstar Analyst and Quantitative Rating, indicating a position to deliver positive alpha relative to the category median in aggregate.

Parent

| Above Average |

J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Performance

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This share class has had varied outcomes, requiring closer analysis. Over the past two years, it beat the category index, the Russell 1000 Growth Index, by an annualized 3.6 percentage points, and outperformed the category average by 7.7 percentage points. Although more importantly, when widening the time horizon, the strategy fell behind the index. On a four-year basis, it trailed the index by an annualized 1.8 percentage points.

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 three-year period. But notably, these subpar risk-adjusted results have not come with a rockier ride for investors. This strategy took on similar risk as the benchmark, as measured by standard deviation. However, the share class proved itself effective by generating positive alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

Price

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It is imperative to evaluate fees, which erode expected returns. This share class is within the cheapest quintile of its Morningstar Category. Its affordable expense ratio, taken together with the fund’s People, Process, and Parent Pillars, suggests that this share class has the ability to deliver positive alpha against its category benchmark, leading to its Morningstar Quantitative Rating of Gold.