JPMorgan Core Plus Bond ETF JCPB ETF Analysis

JPMorgan Core Plus Bond ETF JCPB benefits from the same vast fixed-income resources, seasoned portfolio managers, and collaborative process as its open-end sibling JPMorgan Core Plus Bond JCPUX; it earns a Morningstar Analyst Rating of Silver.

Launched in January 2019, this actively managed exchange-traded fund benefits from the thorough, bottom-up work of well-resourced and seasoned fundamental research analysts. Its management team also boasts considerable depth and experience. Lead managers Steve Lear, J.P. Morgan's U.S. fixed-income CIO, and Andrew Norelli have managed this ETF since inception and make broad asset-allocation decisions based on the firm’s macroeconomic forecasts and input from three veteran sector-focused comanagers, each of whom represents a specialist team from the firm's global fixed-income platform. Rick Figuly, also on the roster since inception, manages the securitized sleeve, while Lisa Coleman and Tom Hauser each joined in July 2020 and oversee the investment-grade and high-yield credit sleeves, respectively. All five of these managers each bring more than two decades of investing experience and long careers at the firm.

This strategy, which sits in the intermediate core-plus bond Morningstar Category, relies on off-benchmark stakes in high-yield credit and securitized sectors to differentiate it from its Bloomberg U.S. Aggregate Bond Index. The ETF typically holds between 5% and 20% of assets in junk-rated corporates (the index features none, and many peers keep that exposure under 10%). Nonagency securitized debt makes up less than 2% of the index, but this team can invest up to 15% in commercial mortgage-backed securities, and up to 10% each in nonagency mortgage-backed securities and asset-backed securities; as of August 2022, the fund held 9% in high yield and 22% in nonagency securitized bonds.

This combination of top-down and bottom-up sensibilities has paid off for investors over this ETF's short track record. Since February 2019 through September 2022, its 1.2% annualized return outpaced the benchmark’s 0.5% and its distinct intermediate core-plus bond category peer median's 0.9%. This 31st percentile showing was even better on a risk-adjusted basis, as measured by Sharpe ratio, outpacing 71% of its rivals.

A thoughtful macro overlay combined with shrewd bottom-up security recommendations result in an Above Average Process rating.

This collaborative process begins with J.P. Morgan's quarterly investment meeting that sets macro themes for the subsequent three to six months while weekly sector meetings focus on relative value and tactical portfolio positioning. Steve Lear and Andrew Norelli synthesize these inputs to set the top-down positioning of the fund, namely the strategy's directional risk profile, sector allocation, and yield-curve positioning. The sector-focused comanagers across investment-grade credit, high yield, and securitized debt are responsible for bottom-up security selection within their respective sleeves and their effectiveness is evaluated versus an internal benchmark. However, these value-driven lead managers can deviate from these benchmarks at times when they see attractive opportunities; for example, relative value in BBB rated corporates led the mangers to increase the fund’s stake to 22% in September 2021 from 6% in March 2020 despite the investment-grade corporate sleeve usually mirroring a higher-quality internal benchmark, the Bloomberg U.S. Corporate A3 or Better Index.

Over time, this strategy has packed more punch than its Bloomberg U.S. Aggregate Bond Index, holding up to 30% in non-investment-grade bonds. Stakes of between 5% and 20% in junk-rated corporates, up to 15% in CMBS, and up to 10% each in nonagency MBS and ABS make up most of this allocation.

Dynamic use of off-benchmark sectors helps the managers actively adjust risk and gives this strategy a yield advantage over its Bloomberg U.S. Aggregate Bond Index.

Amid more attractive credit spreads, the ETF's 19% non-investment-grade allocation (including 5% in nonrated issues) as of August 2022 rose from 9% in 2020. High-yield corporates (9%) and nonagency MBS (5%) made up the largest stakes not included in its benchmark, and nonagency CMBS (9%) and ABS (9%) are prevalent compared to the benchmark’s 2% and 1%, respectively. U.S. Treasuries (30%) and agency MBS (19%) are the fund's largest holdings but represent underweights of 10 percentage points each; within agency MBS, the managers avoid unfavorable convexity profiles of pass-throughs in favor of the more stable cash flows of collateralized mortgage obligations and CMBS. Amid the team's caution around elevated default risk, its high-yield stake fell to 9% as of August 2022 from 13% a year prior in favor of better fundamentals in nonagency MBS and CMBS.

Interest-rate strategies are not large drivers of relative returns, and the managers aim to keep duration, a measure of interest-rate sensitivity, within plus/minus 10% of its index. However, they actively adjust curve positioning and employ Treasury futures to adjust the portfolio, like in 2020 when the team moved duration shorter than its index amid expectations for higher long-term yields. The fund's 6.1-year duration as of August 2022 was slightly defensive versus its benchmark's 6.4 years.

This strategy unites J.P. Morgan's seasoned portfolio managers and its robust analytical resources that underpin an Above Average People rating.

The managers here bring to bear the best of J.P. Morgan's mix of top-down and bottom-up analysis, a testament to the firm's globally integrated platform. Steve Lear, the firm's U.S. fixed-income CIO, and Andrew Norelli manage this ETF since its January 2019 inception and make broad asset-allocation decisions based on the firm’s macroeconomic forecast and sector specialists’ views. Three additional comanagers each represent a specialist team from J.P. Morgan's global fixed income, commodities, and currency platform. Rick Figuly, who manages the securitized sleeve, was also named to the roster at inception, while Lisa Coleman and Tom Hauser, who manage the investment-grade and high-yield credit sleeves, respectively, joined in July 2020. Despite the complexity of this setup, information sharing has usually been effective.

J.P. Morgan's globally integrated team of over 70 fundamental and quantitative research analysts, led by Kay Herr, and over 30 dedicated traders across major fixed-income sectors support the managers here. This stable group has not had any recent turnover of any member directly involved in the strategy and added two experienced securitized credit analysts in 2021.

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 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.

Launched in January 2019, this strategy's track record is still short, but the team has successfully managed its open-end sibling JPMorgan Core Plus Bond JCPUX for almost three decades. Since its inception through August 2022, the ETF’s 1.2% annualized return outpaced its typical intermediate core-plus bond category peer median's 0.9%.

Sibling JPMorgan Core Plus Bond has proved a formidable long-term performer with an eye on downside risk, driven primarily by asset-allocation decisions. Over Andrew Norelli's tenure from March 2014 through September 2022, the strategy's R6 share class’s 1.6% annualized return outpaced the Bloomberg U.S. Aggregate Bond Index's 1.2% and its distinct intermediate core-plus bond category peer median's 1.3%. This top-quartile showing was even better on a risk-adjusted basis, as measured by Sharpe ratio, outpacing 84% of its rivals.

A broad investment menu that includes off-benchmark high-yield credit and nonagency MBS and ABS allows the managers to nimbly rotate in and out of these sectors. Active management has resulted in consistent performance versus peers; it didn't land among the best or worst across calendar years, and typically held up better than peers in stress periods. For example, during the pandemic-driven downturn in March 2020, JPMorgan Core Plus Bond's 2.8% drop was less severe than its peer median’s 3.9% loss and held up better than 70% of its rivals. The managers then took advantage of bargains in investment-grade credit increasing this position to 22% in mid-2020 from 18% at the beginning of the year.

During the volatile year through September 2022, marked by inflation concerns and higher long-term yields, the ETF's 10.4% loss was less pronounced than 72% of rivals thanks to its shorter-than-peer duration and higher allocation to securitized bonds that held up better than corporates.

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. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.