JPMorgan Divers Ret US Small Cap Eq ETF JPSE

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

The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in volatility exposure and an underweight in momentum exposure compared with category peers. High volatility exposure is attributed to companies with a higher standard deviation of returns. And low momentum exposure is rooted in holding stocks that are not currently on a winning streak and instead holding those that managers believe are undervalued. 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 Pillar 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.

JPMorgan Divers Ret US Small Cap Eq ETF earns a High Process Pillar rating.

The main driver of the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Respectable risk-adjusted performance also strengthens the process. This can be seen in the fund's five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. The parent firm's five-year risk-adjusted success ratio of 57% supports the process. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. Their relatively high success ratio suggests that this firm does well for investors and that this fund may benefit from that.

This strategy skews toward smaller, more value-oriented companies compared with its average peer in the Small Blend Morningstar Category. Analyzing additional factors, the managers have continually exhibited a willingness to take risks over the last few years, demonstrated by the portfolio's high volatility exposure. This orientation tends to pay off most prominently when markets are hot. In recent months, the strategy was more exposed to the Volatility factor compared with its Morningstar Category peers as well. This strategy has had lower exposure to momentum stocks over peers in recent years. Momentum tends to be a powerful force in asset markets, as stocks that have done well recently usually continue to do so in the short term. As top performers change, this can sometimes be hard to capture without higher trading costs. Similarly, in recent months, the strategy also had less exposure to the Momentum factor than peers. In addition, this strategy's holdings have included more companies with high dividend or buyback yields than peers over these years. Higher-yield stocks can provide dependable income, but also have their risks. Dividend payers may cut payouts, for instance, if their earnings fall. In this month, the strategy also had more exposure to the Yield factor over its 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 real estate and basic materials relative to the category average by 7.3 and 4.4 percentage points, respectively. The sectors with low exposure compared to category peers are industrials and financial services, underweight the average by 5.9 and 5.0 percentage points of assets, respectively. The portfolio is composed of 569 holdings and its assets are more dispersed than peers in the category. In particular, 4.4% of the strategy's assets are concentrated in the top 10 fund holdings, compared to the typical peer's 23.9%. And in closing, in terms of portfolio turnover, looking at year-over-year movements, 28% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

There are four managers listed on the fund: Yegang(Steven) Wu, Yazann Romahi, Natalia Zvereva, Joe Staines. Together, they manage a total of three strategies, with solid long-term prospects. The strategies average a Gold asset-weighted Morningstar Medalist Rating, indicating a position to deliver positive alpha relative to the category median in aggregate.

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.

Over a seven-year period, this share class outpaced the category's average return by 1.8 percentage points annualized. And it also outperformed the category index, the Russell 2000 Index, by an annualized 1.7 percentage points over the same period.

The risk-adjusted performance only continues to make a case for this fund. The share class outstripped the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. Notably, these strong risk-adjusted results have not come with more volatility for investors. This strategy took on similar risk as the benchmark, as measured by standard deviation. However, the share class proved itself ineffective as it was unable to generate alpha, over the same five-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

This share class lands in the cheapest quintile of its Morningstar Category. Its attractive expense ratio, paired with the fund’s People, Process, and Parent Pillars, indicates that this share class has high potential to deliver positive alpha relative to its category benchmark, explaining its Morningstar Medalist Rating of Gold.