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JPMorgan Diversified Return US Eq ETF JPUS

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Morningstar’s Analysis JPUS

Medalist rating as of .

An unconventional multifactor recipe leaves this fund with some sour spots.

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

An unconventional multifactor recipe leaves this fund with some sour spots.

Analyst Ryan Jackson

Ryan Jackson

Analyst

Summary

JPMorgan Diversified Return US Equity ETF JPUS offers sound factor exposure and diversifies risk well, but its unique construction introduces risks that threaten to blow it off course. It earns a Morningstar Analyst Rating of Neutral.

The JPMorgan Diversified Factor US Equity Index, which underpins this fund, targets stocks with the best combination of value, momentum, and quality characteristics. These factors’ robust track record of market-beating performance makes them a worthwhile pursuit. Measuring stocks’ collective traits rather than building separate sleeves improves factor exposure. Indeed, the fund has effectively channeled the value and quality factors—both of which should enhance returns—though its sector-neutral approach makes it difficult to capture momentum to the same extent.

Diversification is a priority here. That makes sense at the factor level because some, like value and quality, tend to excel at different times. The fund’s weighting scheme—which weights sectors by their inverse volatility and stocks near-equally—promotes diversification as well. At the end of November, no sector exceeded healthcare’s 13.8% allocation. The 10 largest holdings constituted less than 5% of the portfolio, compared with 18% for the Russell 1000 Value Index, its Morningstar Category benchmark. Avoiding concentration can help this fund withstand the different tests the market presents.

This fund’s construction rules breed a portfolio that looks quite different from the category index and broad market. Active shares of 63% and 64% versus the Russell 1000 Value and Russell 1000 indexes, respectively, are a testament to the portfolios’ differences. Unique sector tilts explain much of the difference. This fund’s allocation to the utilities, consumer staples, and basic materials sectors has doubled the Russell 1000 Value Index over the past 18 months, while it has been commensurately underweight in financials stocks. Sector bets do not always work, and they can drown out the effect of factors, which are more reliable performance engines.

That was the case over the first three quarters of 2022, a period that should have benefited this inverse-volatility-weighted portfolio. Hamstrung by its unfavorable tech and energy allocations, the fund fell 50 basis points further than the Russell 1000 Value Index. The fund’s track record remains solid—it ranks in the top quartile of the large-value peer group since its 2015 inception—but its sector risks and complex construction cast a shadow over this strong start.

Rated on Published on

This unique multifactor fund stands to benefit from its comprehensive diversification and pronounced quality exposure, which can be hard to find in value portfolios.

Analyst Ryan Jackson

Ryan Jackson

Analyst

Process

Average

That said, a volatility-driven weighting approach saddles this fund with some lopsided sector bets and can muffle the impact of its targeted factors. On balance, the fund lands at an Average Process Pillar rating.

This fund starts by assigning each Russell 1000 Index constituent a composite factor score that measures its value, momentum, and quality traits relative to its sector peers. Price multiple ratios like price/book determine the value score, and risk-adjusted 12-month performance defines momentum. Quality embodies various metrics that describe companies’ profitability, solvency and financial risk, and earnings quality. The three factors evenly shape the composite score. By evaluating the combination of firms’ factor traits rather than building distinct sleeves, the index rewards stocks with balanced factor profiles and positions itself for more potent multifactor exposure.

The index next establishes its sector allocation by measuring the inverse three-year standard deviation of equal-weighted sector subindexes. Lower volatility translates into higher sector weight. The index fills each sector bucket with stocks whose composite factor scores ranked the best. Rather than target a number of stocks in each sector bucket, the index adds constituents at weights between 0.3% and 0.4% of the total portfolio until the bucket fills up. This equal-weight-adjacent tactic means the number of stocks from each sector mostly depends on the sector weight.

Several constraints preserve index liquidity and diversification. In a notable zag to most competitors’ zig, the index features a minimum turnover constraint of at least 5% of the portfolio at each quarterly rebalance, to preserve factor exposure. It hasn’t sparked too much activity. This fund’s annual turnover ratio ranked well within the category’s lower half in each of its six calendar years on the market.

This portfolio features stocks with relatively attractive valuations, clean bills of financial health, and sound recent performance. Companies don’t need to stand out in these areas if they look solid in all three. For example, the fund holds power management firm Eaton ETN but not fellow industrial stock Boeing BA—one of the cheapest stocks available—because of the former’s more-balanced factor profile. Selecting well-rounded firms has yielded strong multifactor exposure. The fund consistently sports a better return on invested capital than the Russell 1000 Value Index while maintaining a similar value tilt.

This fund diversifies well at the holding and sector levels, too. Its 10 largest positions have constituted between 4% and 6% of the portfolio over the past five years, reducing firm-specific risk. And one sector’s performance shouldn’t dictate absolute returns. At the end of November, healthcare stocks led the way with just a 13.8% portfolio weight, followed by consumer staples (13.3%) and tech (11.4%).

While there is some value in such balanced sector exposure, it requires material tilts from the category benchmark. Utilities, consumer staples, and basic materials stocks each received about twice the weight here as in the Russell 1000 Value Index as of November 2022. Meanwhile, the fund was about 11 percentage points underweight in financials stocks. These differences can cause the fund to perform much differently than the Russell 1000 Value Index. That is not always a bad thing, but sector biases are an uncompensated risk that may hurt this fund even when its targeted factors do their part.

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Portfolio managers from JPMorgan's quantitative beta solutions team oversee this fund.

Analyst Ryan Jackson

Ryan Jackson

Analyst

People

Average

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. Natalia Zverva replaced Alistair Lowe on the fund in November 2022. Joe Staines and Steven Wu round out the lineup.

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'.

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

Associate Director Emory Zink

Emory Zink

Associate Director

Parent

Above Average

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.

Rated on Published on

This fund has churned out stellar results, outpacing the Russell 1000 Value Index by 1.38 percentage points annualized from its September 2015 inception through November 2022, with lower volatility.

Analyst Ryan Jackson

Ryan Jackson

Analyst

Performance

The run mostly stemmed from the fund’s quality bent and favorable sector positioning, though the latter hasn’t helped much in a year that called this fund’s low-volatility merits into question.

Emphasizing the market’s most stable sectors has dialed back volatility, but this fund does not always behave like a low-volatility strategy. Its two best years came in 2020 and 2021—both excellent years for the broad market—when it led the category benchmark by a cumulative 9.89 percentage points. Quality stocks excelled over that span. Stakes in market leaders like Nvidia NVDA, Apple AAPL, and Microsoft MSFT gave the fund an edge in the tech sector, and its relatively large allocations to basic materials and consumer discretionary stocks were a boon.

This came back down to earth in 2022, as it trailed the Russell 1000 Value Index by 91 basis points from January through November 2022. In a difficult year for equities, the fund’s inverse-volatility sector weighting approach actually worked against it. Relatively lean stakes in healthcare and energy—by far the market’s best-performing sector—landed it in the large-value category’s bottom quartile over the 11-month span. This challenging run illustrates the potential pitfalls of shouldering sector risk.

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It’s critical to evaluate expenses, as they come directly out of returns.

Analyst Ryan Jackson

Ryan Jackson

Analyst

Price

Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these expenses, 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.

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Portfolio Holdings JPUS

  • Current Portfolio Date
  • Equity Holdings 353
  • Bond Holdings 0
  • Other Holdings 5
  • % Assets in Top 10 Holdings 4.4
Top 10 Holdings
% Portfolio Weight
Market Value USD
Sector
0.47
2,044,661
Consumer Cyclical
0.45
1,944,976
Healthcare
0.44
1,919,719
Energy
0.44
1,909,486
Communication Services
0.44
1,907,984
Utilities
0.44
1,896,258
Healthcare
0.43
1,883,922
Energy
0.43
1,883,825
Energy

Host Hotels & Resorts Inc

0.43
1,883,177
Real Estate
0.43
1,879,504
Consumer Defensive