JP Morgan has launched four new funds on the London Stock Exchange offering fixed income exposure. The four funds are:
We spoke to our panel of experts to ask what they thought of the new funds. But first, a quick breakdown of what JP Morgan says about the quartet.
Bryon Lake, the head of international ETFs at JP Morgan Asset Management said the provider believes there are “particular opportunities for growth and adoption of fixed income strategies within ETFs”.
Both (JGST) JPM GBP Ultra-Short Income UCITS ETF and (JEST) JPM EUR Ultra-Short Income UCITS ETF seek to provide diversified exposure to very short maturity bonds and debt instruments across investment-grade corporate bonds and government debt. The Ultra-Short Income ETFs have a return target of 0.20-0.40% net of fees over money market funds and a total expense ratio (TER) of up to 22 basis points, waived to 18 basis points until 28 February 2021. JPMAM is also building out its BetaBuilder range, consisting of ‘building block’ ETFs, which offer precise exposure to strategically important areas of the market including now UK Government Bonds and US Treasury Bond indices.
The selling point though is that they are cheaper than most of the big ETFs out there, which is a good thing for investors as it increases competition for the big guns in ETF land; the downside is that they are not the cheapest. The two Betabuilder ETFs are pretty straight forward ETFs holding short-term gilts or treasuries. They could be attractive to investors who believe interest rates have further to rise in the UK or US and they are prepared to give up a little income in order to preserve capital. They are priced at 10bps which is cheaper than most competitor ETFs out there, although I note that Lyxor have two very similar physical products priced at just 7bps. The two ultra-short income ETFs are active ETFs so investors may want to closely review the JPM team’s security selection and internal control processes as these funds are not without risks. On the surface, these ETFs seems to be similar to the Pimco Short Maturity active ETFs (tickers QUID, PJSR and MINT), just cheaper at 0.22%. Given the risks of the Pimco and JPM active ETFs a more detailed review by prospective investors is probably called for.
Generally these funds aim to generate a stable level of income with low volatility, while building up cash through bond maturities and remaining coupon payments. This cash pool will allow investors to profit from rising rates as they affect other instruments that will then be ready for purchase. While the idea is great, it is not the first of its kind. To date, mainly active managers have offered such strategy in fund format. Parallel to the issue of these ultra-short funds we observe the launch of ETFs focused on short term government notes. These ETFs and their low fees keep building pressure in the passive space.
One thing that stands out in the launch of these products is the level of seed capital. Each of these funds appears to be launching with £50m in seed capital, a serious commitment that should help them grow quickly. That said, from a pricing perspective the 1-5 gilts & 1-3 year treasury strategies are more expensive than the current market leader in each of these asset classes (GIL5 & US13). JGST is priced at a more attractive rate for an actively managed ultra-short strategy – the nearest competitor being Invesco’s QUID at 0.35%. However, there is also a passive option offered in the market at 0.09% (ERNS), so JPM will need to demonstrate to investors the value of their active management of the strategy in order to acquire assets. Also interesting is the discount on management fees until 2021 – this typically hasn’t been seen before in the ETF market, where management fees typically decrease as strategies mature and grow, rather than increase.
The focus on mainly corporate bonds with a duration of less than a year positions these ETFs between money market and short-term bond funds, which is an interesting solution for flexible liquidity-managers. It is somewhat unfortunate that the launch is post- the Italian elections as it would have been interesting to observe the ETF’s performance during this volatile period on European bond markets. However, given record levels of public and corporate debt there will likely be more times ahead where the soundness of portfolio construction will be tested.
GBP and EUR short dated bond ETFs are unlikely to be interesting to the majority of private investors as the costs of trading will erode the net yield differential for small and midsized sized accounts. However higher interest rates and a flatter yield curve in the US makes dollar exposure more attractive at the short end and investors will receive a decent yield pick-up. These ETFs serve as a useful building block for advisers and portfolio managers, offering a superior yield to cash without the associated counterparty risks from individual bank accounts. With interest rates expected to rise in the UK at some stage, short duration fixed income is an increasingly popular allocation and JG15 has half the TER of the iShares equivalent.
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