JP Morgan Enters ‘Strategic Beta’ Space with First ETF

JP Morgan Asset Management debuted its first-ever ETF last month, the JP Morgan Diversified Return Global Equity ETF (ticker: JPGE). The new ETF is a developed market equity fund that tracks the FTSE Developed Diversified Factor Index, which was co-developed by JP Morgan and FTSE. The Developed Diversified Factor Index is a rules based index and considers four factors as part of its portfolio construction process: value, momentum, low volatility and size. Details on each of the four factors are as follows:

Four factors for JP Morgan JPGE fund

Designed to be a core equity holding, the fund seeks capital appreciation with reduced volatility by combining an equal risk weighting across global regions and industries with the emphasis on the four factors noted above. The results for the underlying index have been quite favorable since its inception in March 2001, as noted in the illustration below from FTSE’s fact sheet for the index.

FTSE Developed Diversified Factor Index

Since inception, the Developed Diversified Factor Index has outperformed the capitalization weighted Developed Market Index by 4.5% with less volatility. While the fund is still small at just over $15 million in assets, it does warrant consideration as a core global equity holding as it grows in size.

The JP Morgan Diversified Return Global Equity ETF began trading on June 16, 2014. The fund’s expense ratio is 0.38% after an expense waiver of 0.26%. According to a Reuters article, JP Morgan has also filed regulatory documents for two additional funds based on the same appraoch and include a Diversified Return International Ex-North America Equity ETF and a Diversified Return Emerging Markets Equity ETF.

Strategic Beta Funds Explained

JP Morgan’s new fund is considered a “strategic beta” fund, which means that the fund’s portfolio construction process focuses on building a portfolio and weighting the securities on a basis other than the capitalization of each security. According to a recent Morningstar article, more than $290 billion were invested in strategic beta funds at the end of 2013. In the article, Morningstar proposed several classification buckets for strategic beta products that broadly groups different strategies across Return-Oriented approaches, Risk-Oriented approaches and Other. These are highlighted in the below graphic:

Morningstar strategic beta groups

The thinking behind strategic beta funds is that the S&P 500 and other benchmark indices are not optimally constructed, and that their market-cap weighting and related sector imbalances expose investors to unwarranted risks. Given the number of categories within Morningstar’s groupings above, strategic beta advocates have developed a myriad of alternative portfolio construction and security weighting approaches that range from factor based strategies to risk based structures. The good news is that investors have more choice as fund advisors continue to develop and launch new products.