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JPMorgan Ultra-Short Municipal Inc ETF JMST

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Morningstar’s Analysis JMST

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A sensible tax-exempt option at the shortest part of the yield curve.

Our analysts assign Bronze ratings to strategies they’re confident will outperform a relevant index, or most peers, over a market cycle.

A sensible tax-exempt option at the shortest part of the yield curve.

Senior Analyst

Summary

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JPMorgan Ultra-Short Municipal Income ETF's JMST veteran portfolio managers and well-resourced municipal research team ably execute this offering’s investment process. Increased confidence in this team’s stability and experience contributes to an upgrade in the People Pillar rating to Above Average from Average and contributes to the fund’s Morningstar Analyst Rating upgrade to Bronze from Neutral.

While the strategy’s duration (a measure of interest rate volatility) is shorter than most of its unique muni national short Morningstar Category peers, it delivers on its objective of outperforming money market funds and managing volatility. Rick Taormina, Curtis White, and Josh Brunner bring an average of 28 years of experience to managing this offering, and one of the largest dedicated muni credit research teams in the industry and deep resources of JPMorgan support the portfolio managers.

The three managers leading this ETF work closely to assess risks and opportunities, manage liquidity, and deploy the broader JP Morgan muni team to help execute this strategy’s mandate. Taormina heads the JPMorgan Tax Aware franchise and brings his broad views to the strategy, while White applies his experience managing short-duration muni strategies to helm the day-to-day management. Brunner offers his muni credit expertise to complement this high-quality offering. The 12-person credit team supports the portfolio managers and boasts 18 years of average industry experience.

The managers employ a combination top-down and bottom-up approach to investing in the shortest part of the tax-exempt muni market. Sensible restrictions are in place to diversify the portfolio and avoid concentrated sector or state bets. The strategy also leans higher in credit quality than the typical peer; bonds rated A and higher constituted roughly 86% of the portfolio at the end January 2022, more than the typical peer but below its Bloomberg Municipal 1 Year Index. Over the strategy's short track record from November 2018 through February 2022, its 1.4% annualized return lagged 65% of distinct peers, but that's largely to be expected as most in that group regularly buy longer-maturity bonds. However, this ETF’s performance against similarly managed ultrashort muni peers is competitive.

For investors seeking cash-plus tax-exempt returns with low volatility, JMST is a solid option that effectively fills this niche.

Process

| Average |

An established muni process honed over many years serves as the cornerstone for this offering, but its relatively short track record earns it a Process Pillar rating of Average.

This strategy’s mandate offers returns in excess of cash and with lower volatility than typical peers in the muni national short category. The average duration of the peer group is slightly above 2.0 years, compared with the strategy’s duration of less than 1.0 year. This high-quality offering seeks to diversify across sectors and geographies while keeping a close eye on liquidity through a mix of fixed- and floating-rate securities.

The process relies on daily communication among the strategy’s team but also across JPMorgan’s broader group of muni portoflio managers and traders to effectively execute its objective. The team also leverages proprietary technology to scrub thousands of bid lists each day to uncover relative value opportunities. For example, JPM bids for scores of odd-lot (less than $100,000 par value) muni bonds that may trade at a yield premium to larger blocks. As such, the portoflio holds 15% in these smaller positions to add incremental yield.

Ongoing credit monitoring and sensible portfolio guardrails underpin the risk management process here. The strategy must diversify across at least 20 states and 30 distinct issuers. It also limits nongovernmental sectors to 25% of assets, single issuers to 4%, and below-investment-grade paper to 10%. Liquidity is an important aspect of this strategy, and the team typically holds 20%-30% in cash, variable-rate demand notes, and bonds maturing within two weeks.

People

| Above Average |

JPMorgan’s veteran management team and large, dedicated muni research staff earn this strategy a People Pillar rating upgrade to Above Average from Average. This team-managed strategy has another year under its belt, and a stabilized and growing credit research staff make this one of the deepest and most experienced cohorts in the industry.

Veteran portfolio managers Rick Taormina, Curtis White, and Josh Brunner boast an average of 28 years in muni experience, and each brings something different to the table. Taormina, a 32-year industry veteran, is head of JPMorgan’s Tax Aware Strategies franchise and provides a broad view of the muni market. White brings 28 years of experience primarily managing cash strategies and is well-suited to navigating day-to-day liquidty, while Brunner leverages his expertise in muni credit to add value at the margins.

The portfolio managers are supported by a dedicated muni research team that covers both high-yield and investment-grade issuers. In 2021, the JPMorgan Asset Management muni team absorbed a tax-exempt investment team from JPMorgan’s Private Bank business to add depth and stability to an already established group. The team now has 12 research analysts under the JPMAM umbrella to support the muni platform. While turnover on the analyst team was a concern in recent years, the credit team has stabilized and now has a good balance across experience levels.

Parent

| Above Average |

J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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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 Bronze.

Performance

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Over its short history, JMST has delivered returns higher than money market funds and generally higher than other ultrashort (less than 1.0 year duration) muni offerings. This strategy isn't a perfect fit for its muni national short category because of its ultrashort duration mandate, and long-term performance may lag its longer-duration peers as a result.

Since inception (November 2018-February 2022), its 1.4% annualized return fell below more than 65% of distinct category rivals. When compared against a subset of distinct ultrashort peers, it was much more competitive, outpacing more than 80% of that subgroup, and its risk-adjusted performance (as measured by the Sharpe ratio) ranked near the top of the broad category.

Security selection and an active search for incremental yield drives performance for this strategy, while its short duration and high average credit quality damp volatility. During the risk-on period of 2019, for example, the strategy's 2.2% showing lagged 79% of distinct category peers. However, these same portfolio characteristics have recently helped soften the impact from higher yields.

Periods of rising rates should favor this ETF versus peers, while it may lag longer duration offerings in normal and falling rate periods. Investors can expect it to consistently compete with money market funds while managing price volatility.

Portfolio

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The team seeks relative value opportunities on the very front end of the muni yield curve while actively monitoring a moderate fixed- and floating-rate note allocation to maintain adequate liquidity. Given the high-quality, ultrashort nature of this ETF, management has limited levers to add value. However, it deftly leverages JPMorgan’s size to add incremental value as an active participant in primary and secondary markets. Odd-lot trading represents an opportunity for the team to bid on hundreds of these bonds each day that can be scooped up at incrementally higher yields than larger pieces. As a result, the portoflio has more than 12,000 individual holdings, far more than the nearest short-term rival.

The strategy is managed against the Bloomberg Municipal 1 Year Index but typically keeps duration less than 1.0 year. Its portfolio includes a diversified mix across muni sectors and geographies while limiting individual issuer exposures. The portfolio’s short duration distinguishes it from most of its muni national short category peers. As of February 2022, its 0.8-year duration was considerably less than the typical peer's 2.2 years. The portfolio also leans higher in credit quality than most category rivals, with roughly 86% of assets in bonds rated A or higher. As of January 2022, the portfolio’s largest allocations were to local general-obligation bonds (24%), healthcare (10%), and leasing (10%).