J.P. Morgan jumps into white-hot ETF fray

Mutual fund giant develops strategy to capture the fast-growing use of exchange-traded funds

Jun 16, 2014 @ 12:09 pm

By Trevor Hunnicutt

J.P. Morgan Asset Management, one of the dominant U.S. mutual fund sponsors, is launching its first exchange-traded fund Tuesday — the latest product in the white-hot market for so-called “smart beta.”

The move into ETFs by the bank-owned, seventh-largest mutual fund company signals a growing appreciation by top providers of mutual funds that ETFs are here to stay.

The launch — part of a corporate strategy in the works for more than a year — comes as surveys point to higher adoption of ETFs by advisers and declining interest in many actively managed mutual funds once thought to be an indispensable core holding in client portfolios.

It also comes as so-called rules-based active management has gained steam. Smart beta, which bakes increasingly intricate factor-based strategies into benchmark rules, is seen as a part of that trend.

The JPMorgan Diversified Return Global Equity ETF (JPGE), which is based on an index developed with FTSE Group, is being offered with a total annual expenses of 0.38%. The index combines four market factors — attractive relative valuation, positive price momentum, low volatility and small market capitalization, according to documents provided by the firm — in determining the relative weights of stocks held by the fund.

It starts trading Tuesday on NYSE Arca.

“Smart beta is definitely the flavor of the month in the ETF space — there've been a slew of products launched ranging from really simple factor strategy to real black-box strategies and the kinds of strategies that J.P. Morgan Asset Management [is developing],” said Dave Nadig, chief investment officer for ETF.com, a research firm.


Because of the looseness of the catchall term smart beta, a term despised by people including Nobel Prize-winning economist William F. Sharpe, it can be hard to provide exact figures on the growth of those products. But multi-factor ETFs like J.P. Morgan's increased to 142 funds from 111 over the year ending last week, with assets in those funds increasing by more than $15 billion. Overall, factor-driven ETFs have increased by more than $93.8 billion over that period, according to ETF.com.

Some financial analysts say the term can be a misleading way of describing products that might be pricier and come with their own set of risks, including underperformance of the ostensibly not-smart “beta,” or market-aligned, products they might be tracked against.

J.P. Morgan is using the term "strategic beta" to refer to its product.

Boldface names in asset management are making a big investment in the space. Goldman Sachs Asset Management said in April it was acquiring Westpeak Global Advisors in light of the firm's expertise in the area. This month State Street Global Advisors launched a series of funds based on MSCI indexes and a so-called "quality" screen, emphasizing low debt and earnings growth, among other factors.

These smart beta indexes are not market-cap weighted, unlike traditional indexes, which by definition require greater exposures to stocks with higher market value. Some investors think it's theoretically impossible to achieve an efficient balance between risk and return with market-cap-weighted indexes because factors such as company size and price momentum have outperformed.

But so far, smart beta-labeled products have yet to prove they can do better, according to Mr. Nadig. And advisers will be evaluating the more complex multi-factor products the same way they do with active managers — waiting three years to see how the strategy performs through different market climates.

But Robert Deutsch, global head of ETFs for J.P. Morgan Asset Management, said it would be unfair to characterize the new fund as employing a “black-box strategy” because of the transparency of ETFs themselves, which make regular disclosures of their underlying holdings, among other regulatory mandates.

Mark Makepeace, founder and chief executive of the FTSE Group, which helped build the index, said multi-factor funds like these are an evolution on single-factor products that will increasingly bring institutional-level investing to the greater public at a lower cost. Many retail clients are looking for a more packaged solution rather than having to combine factors themselves, which could be cumbersome and technical, he said.

“We've tended to do these products for big institutional investors and they tend to be the big sovereign wealth funds who put billions into these types of products,” Mr. Makepeace said. “What we're starting to do now is bring these types of approaches into the public arena so that retail investors can get access.”

Mr. Deutsch said investors should expect the fund will deliver higher risk-adjusted returns, or Sharpe ratios, than market-cap-weighted funds.


The backdrop of the launch is advisers' growing use of ETFs — and their declining use of comparable actively managed mutual funds.

The Financial Planning Association said last month that 79% of advisers use or recommend ETFs to their clients, up from 40% in 2006.

Actively managed domestic equity mutual funds lost $575 billion from 2007 to 2013, while index funds and ETFs, which are primarily benchmarked, gained $795 billion, according to the Investment Company Institute, a fund industry trade group.

But even top mutual fund companies have been slow to fully engage in the ETF market. Last year, having only one ETF at the time, Fidelity jumped into the market with its own offering as part of a larger strategic alliance with BlackRock Inc., the world's biggest money manager with both a mutual fund and an ETF business.

As for J.P. Morgan, the firm has been actively plotting its strategy for the better part of two years, deciding on questions of whether to acquire an outside firm that already builds ETFs or choosing, as they did, to build their own products, according to Mr. Deutsch, the J.P. Morgan executive. The firm has hired a team of 12 so far to operate and sell its funds.

They said they have no intention to put active managers out of business.

“We think there's lots or room and lots of need in the market for the full range of active products, whether it's driven more rules-based or driven through portfolio management and manager selection,” Mr. Deutsch said.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print