JPMorgan Ultra-Short Municipal Inc ETF JMST

This actively managed tax-exempt exchange-traded fund bridges the gap between a municipal money market fund and short-duration strategy. JPMorgan Ultra-Short Municipal Income ETF’s JMST veteran managers’ focus on liquidity and making astute relative value calls between traditional municipals and liquidity markets underpins this approach to earn an upgraded Process rating to Above Average from Average.

Rick Taormina’s mid-February 2024 departure after more than 20 years at the helm of the firm’s Tax Aware platform was a surprise, but J.P. Morgan’s depth and ability to attract top-flight talent lessened the impact of this loss. In response, Rachel Betton rose to the lead role despite being at the firm only since July 2023; she arrived from Pimco after 17 years there and is the lead manager for JPMorgan High Yield Municipal ETF JMHI. Betton’s leadership appointment makes sense here given her unique perspective and extensive municipal background.

Taormina’s leaving means that municipal veterans Curtis White and Josh Brunner will now comanage the strategy. This duo brings more than 25 years of average industry experience, most of it with J.P. Morgan. They collaborate to assess risks and opportunities and manage liquidity, although White takes the day-to-day lead with his expertise in liquidity and short-duration muni markets; Brunner’s muni credit expertise complements the core of this high-quality offering. The managers draw on a 12-person muni research group that averages nearly two decades of experience.

The ultrashort strategy means duration will be less than 1 year, shorter than muni national short Morningstar Category’s 2-year average. Sector and geographic diversification are key in addition to the ETF’s high-quality bent, although junk-rated paper may appear in the portfolio to add value at the margin. The team excels at identifying and acting on relative value opportunities between fixed- and variable-rate paper and supply and demand changes.

When yields in variable-rate paper rose in 2022, the managers increased these stakes to 31.8% of assets as of December 2022 from 16.8% a year earlier. This also shortened duration to 0.5 year from 0.8 year to better protect against rising rates and enhance the ETF’s liquidity profile. However, when recession fears arose in 2023, the variable-rate notes fell to 20% of assets and the ETF’s duration lengthened to 0.8 year in June, then back to 0.6 year by year-end.

Performance since the ETF’s November 2018 inception is compelling, but this fund typically shines in periods of rising rates and lags in normal and falling yield periods. The strategy’s active style should help it compete against rivals in most market environments.

Another year of solid decisions and compelling results earns an upgraded Process rating to Above Average from Average.

Comanagers Curtis White and Josh Brunner actively manage the very front end of the yield curve in this strategy’s aim to outperform money market funds. Security selection, duration management, and a constant search for incremental yield drives performance. The ETF keeps duration (a measure of interest-rate risk) typically less than one year, but it’s not static. The strategy’s guidelines ensure diversification across at least 20 states and 30 distinct issuers and limit nongovernmental sectors to 25% of assets, single issuers to 4%, and below-investment-grade bonds to 10%.

Liquidity is key here, and the team typically holds 20%-30% in cash, variable-rate demand notes, and bonds maturing within two weeks. Sectors and geographic diversification are important, but portfolio construction is not always intentional as the managers often take what the market gives. This relies on strong collaboration to identify the best yield opportunities and manage liquidity through a mix of fixed- and floating-rate paper.

J.P. Morgan’s proprietary technology, which scrubs thousands of bid lists each day to uncover higher yields in odd lots (less than $100,000 par value) compared with larger blocks, aids the effort to find good value, although this has had less of an impact as the strategy has grown.

This ultrashort mandate doesn’t fit neatly into its muni national short category and its less than 1 year duration is shorter than the 2-years average of its typical rival. The managers strive to keep rate volatility low and ensure sufficient liquidity, which leads them to use a mix of fixed- and variable-rate bonds and notes. For example, the team increased the portfolio’s floating-rate stake to 31.8% of assets as of December 2022 from 16.8% a year earlier, which shortened duration to 0.5 year from 0.8 year to better protect against rising rates and enhance the ETF’s liquidity profile. Variable-rate notes fell to 20% of assets in 2023 as the managers edged duration longer amid recessionary concerns.

The team also seeks to find attractive relative value across various municipal sectors and geographies. In the early days of the strategy, local general-obligation bonds accounted for about a third of the ETF’s assets but made up about 24% as of year-end 2023. Attractive valuations in healthcare-backed munis led the team to increase this stake to 19.3% of assets by the end of 2022, up from 10.6% a year prior, but reduced this stake to 11.5% at 2023’s end.

Though junk-rated paper can account for as much as 10% of assets, it typically makes up less than 1 percentage point. The strategy’s 17.2% in nonrated bonds at year-end 2023 was down slightly from the prior year when it was near its historical high; these internally rated credits are typically investment-grade.

Curtis White and Josh Brunner, each of whom has more than two decades with the firm, have been on the strategy since its 2018 inception. While this duo collaborates on portfolio decisions, White manages the day-to-day positioning and leverages his experience managing cash and cash-plus tax-exempt strategies. It’s this focus on liquidity and relative value opportunities between money market eligible bonds (variable rate and bonds maturing in less than one year) and those a bit further out on the curve that gives this team an edge. Brunner’s municipal credit focus seeks to add value at the margins; he works closely with the research team and focuses on BBB and A rated bonds.

With one of the deepest and most experienced teams in the municipal industry, this team stands out. Alongside the managers, 12 muni researchers provide bottom-up credit analysis for both high-yield and investment-grade issuers. While the team experienced some senior retirements over the past couple of years, J.P. Morgan has replaced these positions with experienced personnel. In 2022, when head of muni research Kyle Gephart left for another career opportunity, 17-year muni research pro Neene Jenkins assumed the lead role; she joined J.P. Morgan in 2019 from AB.

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 November 2018, the strategy’s 1.7% annualized gain through January 2024 beat its distinct muni national short category median peer’s 1.5% and the Bloomberg Municipal 1-Year Index’s 1.4%. When compared against a subset of distinct ultrashort peers, it was even better, outpacing more than 80% of that subgroup, and its volatility-adjusted performance(as measured by Sharpe ratio) ranked near the top of the broad category.

The strategy’s shorter-duration and high-quality risk profile helps dampen volatility and can protect better in rising yield environments, but it may lag in normal and falling rate periods. During 2019’s risk-on period, for example, the strategy's 2.2% showing lagged nearly four fifths of distinct category peers. However, the portfolio’s style and strong relative value calls helped soften the impact of 2022’s higher rates when the ETF’s 0.15% return was better than its typical rival's 2.9% loss, ranking among the peer group’s top quintile.

Calendar 2023 marked another solid year. The ETF’s 3.3% return was better by nearly a 0.5 percentage point and ahead of four fifths of rivals. The strategy’s yield advantage helped here; the fund’s 12-month yield was about 3.0% as of December 2023, about 0.5 percentage point higher than its typical competitor.

This ultrashort mandate isn't a perfect fit in the muni national short category, but it has delivered on its promise to beat money markets and held its own versus a broader peer group whose average duration is around 2 years.

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.