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.