The launch in the middle of
this month of two multi-factor ETFs
from JP Morgan Asset Management (JPMAM) seemed to mark a new stage in the provider’s burgeoning European-facing operations.
The firm said the new funds – which mirror offerings to US clients – came about after seeing significant client interest in these types of strategies.
The JPMorgan Global Equity Multi-Factor UCITS ETF (JPGL) and the JPMorgan US Equity Multi-Factor UCITS ETF (JPUS) are listed on the London Stock Exchange, Deutsche Börse Xetra and the Borsa Italiana and come with total expense ratios (TERs) of 0.19%.
JPGL will track the JP Morgan Diversified Factor Global Developed (Region Aware) Equity index while JPUS will look to match the performance of the JP Morgan Diversified Factor US Equity index.
JPMAM says traditional indices can be highly concentrated in certain sectors so the strategies use the firm’s quantitative beta strategies team to adjust sector weightings based on a proprietary methodology. The team then look to diversify factor risk by screening stocks based on the value, quality and momentum factors.
What the panel says:
Kenneth Lamont, Morningstar
With the single-factor equity space getting crowded, most new strategic beta launches in Europe now employ multi-factor equity strategies. With their first foray into the European multi-factor market, JPMorgan are making a statement with the launch of the Global Equity Multi-Factor and the US Equity Multi-Factor ETFs. Aggressively priced (ongoing charge of 0.19%) the new offerings are the cheapest multifactor ETFs targeting their respective exposures.
The ETFs select stocks based on momentum, quality and value factors while controlling for sector and regional biases. By diversifying across factors, each of which can suffer long periods of underperformance investors can hope to improve the prospective risk/return profile of a market-cap index. The short live track records for many multi-factor strategies can make due diligence tricky. By ‘porting’ strategies which have already cut their teeth stateside, JPMorgan have given investors the luxury of a longer live track record to examine.
Oliver Smith, IG Portfolios
The new multi-factor ETFs from JPMAM, enter an already competitive space with rival products from iShares, Invesco, HSBC and Vanguard already launched. While nominally targeting the value, quality and momentum factors, arguably the biggest determinant of future relative returns versus a market cap index is the size factor.
Both JPUS and JPGL have significant underweights to the market heavyweights. This is not necessarily a bad thing, but it will be an important driver of ongoing return differentials. Positively they have arrived competitively priced, with JPUS and JPGL costing just 0.19% compared to, for example, iShares Edge MSCI USA multifactor (IFSU) at 0.35%.
Interestingly both JPUS and IFSU perform quite differently, meaning a thorough analysis of the two is required before making a decision based on price alone.
Mark Northway, Sparrows Capital
At Sparrows Capital we tend to avoid multi-factor ETFs. The theoretical benefits of these instruments include the management of concentration risk, consistent exposures to targeted risk factors and a reduction in the number of instruments required to maintain a multifactor portfolio.
But these advantages are more than offset in our view by the black-box nature of the multi-factor algorithm (particularly where a proprietary index is used), by the internal transaction costs required to track an omnibus index and by increased tracking error relative to the capitalisation weighted market. Constructing multi-factor global equity portfolios is a complex process which can produce unintended consequences.
Using single-factor ETFs arguably adds complexity since most stocks are correlated with more than one factor - the output factor exposures of a multi-factor portfolio constructed with single-factor ETFs must be measured to take account of non-targeted exposures ETFs and the mix adjusted accordingly.
ETF providers in smart beta catch 22
Nevertheless, we feel that performance attribution is more easily carried out on a such a portfolio than on a multi-factor ETF, and outcomes can more easily be explained to the end investor.
From our perspective the selection of factors in the JPMorgan product is problematic. We find that the academic evidence supports size, value, momentum and minimum volatility, while the JPMorgan multi-factor ETFs focus on value, quality and momentum.
Investors will need to assess whether JPMorgan’s selection of factors coincides with their own preferences. The 0.19% OCF on the JPMorgan suite is very competitive at 0.19% and significantly undercuts the 0.55% charged by the Invesco Goldman Sachs Equity Factor Index World UCITS ETF (EFIW).