JPMorgan Ultra-Short Income ETF JPST

JPMorgan Ultra-Short Income ETF’s experienced liquidity-focused portfolio managers, considerable supporting resources, competitive fees, and responsible approach earn it a Morningstar Medalist Rating of Silver.

The team is seasoned and deep. Lead portfolio manager James McNerny leads the day-to-day management of this actively managed ETF that sits within JPMorgan’s Global Liquidity platform. He joined JPMorgan in 2000, focuses exclusively on front-end strategies, and has served as comanager here since the ETF’s May 2017 inception. Three seasoned comanagers that average over 25 years of industry experience surround McNerny: David Martucci, Cecilia Junker, and Kyongsoo Noh. The managers draw on the vast resources of the firm’s Global Fixed Income, Currency & Commodities platform, including 21 investment-grade corporate bond and seven securitized analysts that inform security selection.

This group aims to maintain liquidity but generate higher returns than prime money market funds while limiting potential mark-to-market losses. The strategy is typical in its marriage of top-down views with bottom-up security selection but its approach that strikes a balance between money markets and longer-term strategies sets the ETF apart from most ultrashort peers that do not lean on a dedicated liquidity platform.

The strategy’s robust process helps accomplish its liquidity-centric goals. The team’s monthly view on macro factors and expected scenarios drives the ETF’s six-month outlook and informs portfolio positioning. The team dynamically adjusts duration (a measure of interest-rate sensitivity), which is typically less than one year, while corporate-backed and securitized debt receives the most focus despite the sectors being absent from the strategy’s ICE BofA 3-Month U,S. Treasury Bill Index benchmark. Sensitive to the ETF’s liquidity profile, it typically holds between 15% and 35% in securities that mature in less than one year.

The ETF’s short track record has produced compelling results. Since May 2017, its first full month of performance, the strategy’s 1.9% annualized gain through May 2023 beat its distinct ultrashort bond Morningstar Category median peer’s 1.6%, ranking in the best quintile. Its volatility-adjusted performance, as measured by Sharpe ratio, was even better, landing in the category’s top decile. Its conservative positioning has limited the downside in stress periods and its focus on higher-yielding investment-grade bonds has also helped beat peers over calendar years.

The strategy earns an Above Average Process rating.

While the ETF has only been around since May 2017, JPMorgan has honed its conservative approach over multiple decades managing ultrashort duration strategies for institutional clients. The strategy is typical in its marriage of top-down views with bottom-up security selection but its approach that strikes a balance between money markets and longer-term strategies sets this ETF apart from most ultrashort peers that do not lean on a dedicated liquidity platform.

The comanagers begin with the broader team’s monthly view on macro factors and expected scenarios that drive the ETF’s six-month outlook and inform duration, yield curve, sector, and liquidity positioning. The team dynamically adjusts yield curve and duration, which is typically less than one year. Corporate-backed and securitized debt receives the most focus despite the sectors’ absence from the ICE BofA 3-Month U.S. Treasury Bill Index benchmark. A function of issuance needs for short-term financing, financials dominate the portfolio, but JPMorgan’s small army of investment-grade credit analysts vet each holding, assigning an internal rating to each issuer.

This team is sensitive to the ETF’s liquidity profile, typically holding between 15% and 35% in securities that mature in less than one year; this stake includes cash, money markets, certificates of deposit, and commercial paper.

Various types of investment-grade corporate debt make up the majority of the ETF while securitized bonds and U.S. Treasuries round out the portfolio; the strategy’s U.S. Treasury-only benchmark does not guide portfolio construction as these stakes typically only make up a small percentage of assets.

Lead portfolio manager James McNerny and team don’t reach for yield, but instead focus almost exclusively on investment-grade debt while keeping a keen eye on the portfolio’s liquidity profile. Over its history, corporate credit has dominated the portfolio with between 70% and 90% allocations, including fixed-rate corporates, commercial paper, and certificates of deposit. More recently, the ETF has held this stake near the lower end of this range, instead favoring higher cash stakes. The fund’s conservative risk profile doesn’t give it a yield advantage versus ultrashort bond peers, typically hovering near the middle of the pack. The liquidity bias comes through in their allocation to bonds with less than a year to maturity, which has ranged from 10% to 60%. As of March 2023, the ETF’s cash stake was near the upper end of this range given the managers’ caution on the economy.

The managers use duration to their advantage. While the ETF’s duration is typically less than one year, the team has actively managed duration between 0.25 to 1.0 years. For example, the team gradually shortened its duration to about 0.3 years throughout 2022, amid aggressive Federal Reserve rate hikes, from nearly 0.8 years in mid-2021. They repositioned longer to 0.85 years as of March 2023 as the Fed nears the end of its hiking cycle.

This seasoned team that sits within JPMorgan’s Global Liquidity platform brings specialized experience and depth to the strategy. James McNerny sets the tone here; with JPMorgan since 2000, he has led this ETF since its May 2017 inception and focuses exclusively on ultrashort bond strategies that typically feature duration of less than one year. Three comanagers that bring an average of more than 25 years of industry experience sit alongside McNerny: David Martucci, head of managed reserves portfolio management; Cecilia Junker; and Kyongsoo Noh.

McNerny leads the day-to-day management of the ETF, but the strategy’s team-based approach relies on inputs from the comanagers to determine duration, yield curve, sector, and liquidity positioning. In addition to the firm’s dedicated liquidity specialists, this team draws on the vast resources of its Global Fixed Income, Currency & Commodities platform, which includes 21 investment-grade corporate bond, and seven securitized analysts that select securities.

Stability is a strength. This team has worked together for over 10 years and apart from some turnover among fundamental analyst ranks, nobody material to the strategy has left in recent years.

The portfolio managers share in the performance of the ETF. McNerny and Martucci each have personal stakes between $100,000 and $500,000; Junker between $10,000 and $50,000; and 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 May 2017, its first full month of performance, the strategy’s 1.9% annualized gain through May 2023 beat its distinct ultrashort bond Morningstar Category median peer’s 1.6%, ranking in the best quintile. Its volatility-adjusted performance, as measured by Sharpe ratio, was even better, landing in the category’s top decile.

Security selection, duration management, and an active search for incremental yield drives performance while its short duration and higher credit quality tilt dampen volatility. The aim of the strategy is to outpace prime money market funds by 40-60 basis points over a market cycle, which it has done since its inception. The strategy’s ICE BofA 3-Month U.S. Treasury Bill Index is not a relevant measure of relative performance. The ETF does not prominently feature U.S. Treasuries, but instead relies on corporate-backed debt and securitized bonds to generate yield.

Its conservative positioning has helped limit the downside in stress periods. During its worst downside period during the pandemic-driven volatility of March 2020. The ETF’s 1.6% drawdown was less severe than its median rival’s 1.8% loss. But over calendar 2020, the strategy rebounded to post a 2.2% gain, about 65 basis points better than its typical peer. As spiking interest rates rocked bond markets during calendar 2022, the strategy’s shorter duration helped it outpace 80% of peers.

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.