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JPMorgan Diversified Return Intl Eq ETF JPIN

Analyst rating as of
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Morningstar’s Analysis JPIN

Analyst rating as of .

A multifactor strategy with a lot of moving parts.

Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

A multifactor strategy with a lot of moving parts.

Senior Analyst

Summary

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JPMorgan Diversified Return International Equity ETF JPIN has several characteristics that suggest it should perform well against the MSCI ACWI ex USA Index. But its sector bets and stock-specific risks may derail its performance in unexpected ways. It earns a Morningstar Analyst Rating of Neutral.

This strategy starts with the FTSE Developed ex North American Index and splits it into four regions and 10 sectors within each region, creating 40 regional sector buckets. It weights each of those segments by the inverse of its historical volatility, pushing the fund toward stable segments of the market and away from those that are more volatile. Within each regional sector, the strategy ranks constituents by their value, momentum, and quality characteristics. It combines these scores into an overall composite score and sweeps the highest-scoring names into the portfolio. Stocks within each regional sector are weighted equally, subject to constraints designed to promote diversification and liquidity.

This portfolio looks substantially different from the market. It tends to lean toward smaller stocks trading at lower valuations while also overweighting less-risky segments of the market. Those characteristics should be a long-term advantage. But the portfolio is making other active bets that can undermine its performance. For example, the fund's preference for cheaper stocks worked to its advantage over the two years through September 2022, when value stocks were in favor. However, stock-specific risks caused it to trail the MSCI ACWI ex USA Index by 1.5 percentage points over that same stretch.

Overall, the portfolio possesses some defensive characteristics, but its downside protection has been fickle. JPMorgan launched this exchange-traded fund in late 2014 when the market was in a drawdown, and it initially outperformed the MSCI ACWI ex USA Index by 10.3 percentage points per year from December 2014 through January 2016. Since then, it hasn't provided much shelter from stormy markets. The portfolio underperformed its Morningstar Category index during the coronavirus-driven selloff, and its benchmark-relative advantage for the first nine months of 2022 has been paltry.

Process

| Average |

This fund tries to hold stocks with a combination of attractive factor characteristics while cutting back on risk. It incurs a large amount of active risk in the process, which may cause it to perform in unpredictable ways. For that reason, we are downgrading its Process Pillar to Average from Above Average.

The portfolio managers try to fully replicate the JP Morgan Diversified Factor International Equity Index. This benchmark starts with all stocks in the FTSE Developed ex North America Index and scores each one on its value, quality, and momentum characteristics. A composite score for each stock is calculated by equally weighting these individual factor scores.

After scoring stocks, the strategy divides the starting universe into four regions (Japan, Asia ex-Japan, United Kingdom, and Europe ex-U.K.) and splits each region into its 10 ICB sectors, creating 40 regional-sector buckets. These regional sectors are weighted according to the inverse of their trailing three-year volatility, which tilts the portfolio toward less risky segments of the market. Each bucket then ranks its constituents by their composite factor score and adds names, starting with those having the most attractive scores. The process continues until each bucket holds the top scoring 70%, or it cannot hold any more names while simultaneously satisfying constraints designed to promote diversification and liquidity. The strategy tries to equally weight stocks in each regional sector, but its diversification and liquidity caps can change those weights. This final step is an iterative process because capping the weight of individual stocks can shift the weights of the regional sector buckets away from their target weights.

The index rebalances quarterly in March, June, September, and December. The strategy incurs at least 5% turnover at each rebalance. Larger amounts of turnover are required when the fund’s regional sector weights drift too far from their target weights.

The portfolio's composition reflects its preference for less-volatile segments of the market. It has tended to be overweight in utilities underweight in financials. It also leans toward stocks from the U.K. and Japan because their U.S.-dollar-denominated standard deviations have been lower than other regions. The volatility of Japanese stocks has been considerably lower than other regions because the dollar-yen exchange rate was negatively correlated to local Japanese stock returns, meaning yen-denominated returns have been more volatile than dollar-denominated returns.

The stocks within each regional sector bucket have an attractive combination of value, momentum, and quality characteristics. But the portfolio's overall factor exposure tends to skew toward names trading at lower valuations. Its average profitability, a proxy for quality, has tended to be lower than the MSCI ACWI ex USA Index. The strategy tries to equally weight stocks within each regional sector bucket, causing the portfolio to emphasize those with smaller market caps. Its average market cap has consistently been about one third that of the benchmark.

Few stocks make the cut for this portfolio. It only holds about 20% of the names in the MSCI ACWI ex USA Index. Stock selection may play a prominent role in the fund’s index-relative performance.

People

| Average |

Portfolio managers from JPMorgan's quantitative beta solutions team oversee this fund. The team has the tools and experienced personnel necessary to provide tight index tracking, but it does not have the resources of its larger competitors. It earns an Average People Pillar rating.

JPMorgan's quant beta solutions team was formed in January 2017, when it took over management of this fund and JPMorgan's other strategic-beta ETFs. Four portfolio managers share responsibility for this portfolio. Yaz Romahi serves as the team's CIO and helped develop the strategy. Victor Li has been with JPMorgan for over a decade and is head of quant research. Joe Staines and Kartik Aiyar round out the lineup. Both started their asset management tenures at JPMorgan in mid-2014.

Most of the team's workflow is conducted through Spectrum—JPMorgan's in-house portfolio management platform—which automates many aspects of day-to-day workflow. Two risk oversight teams monitor the funds managed by the quant beta solutions team. Both provide tracking-error targets, and tracking performance is formally reported each quarter. The managers' compensation is tied to tracking performance, aligning their interests with investors'.

Parent

| Above Average |

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

Performance

JPMorgan launched this ETF in early 2014 when the market was in a drawdown, and its low-risk profile helped it get off to a great start. The portfolio outperformed the MSCI ACWI ex USA Index by 10.3 percentage points per year from December 2014 through January 2016. That's consistent with expectations for a low-risk strategy, but stock-specific performance played a big role in that outperformance.

The fund's index-relative performance has been on a long slow slide down since early 2016. Some of that is expected. It trailed the category benchmark during most of 2016 and 2017 when the stock market ran hot, which is in line with expectations for a low-risk portfolio. However, it did not deliver any downside protection during subsequent drawdowns, such as the second half of 2018 or the coronavirus selloff. Likewise, its performance over the first nine months of 2022 was lacking. It lost almost 26 percentage points over that period, beating the MSCI ACWI ex USA Index by only 54 basis points. Index-relative performance is similar if the fund is compared against the MSCI World ex USA Index, a proxy for its parent universe, over these nine months.

The fund's average price multiples have been consistently lower than the MSCI ACWI ex USA Index's, indicating that it is oriented toward the value factor. That should have been an advantage for the portfolio over the two years through September 2022. However, it underperformed the MSCI World ex USA Index by 3.8 percentage points per year and the MSCI ACWI ex USA Index by 89 basis points per year from November 2020 through September 2022. Its value and small-size characteristics added to its performance, but stock-specific risks weighed on its performance and ate away at those advantages.

Price

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Even so, based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.