In a year where many industry commentators pondered just how big the active ETF space could grow, there was one launch that caught my eye.
The unveiling of the $40m JPM Active Global Aggregate Bond UCITS ETF (JAGG) in October encapsulates the strides that have been made by active ETFs over the past 12 months and is further evidence of active strategies becoming increasingly mainstream.
JPMAM has been at the forefront of this growth in a market that hit $29.1bn at the end of Q3 2023, according to data from ETFbook.
Entering the competitive global bond market, JAGG’s active price premium makes it the most expensive global aggregate ETF in Europe, with a total expense ratio (TER) of 0.30% versus 0.10% for some of the continent’s leading products.
However, what it lacks in price competitiveness it hopes to make up for in alpha generation as it aims to outperform its benchmark via bottom-up security selection and top-down sector allocation.
Benchmarked against the Bloomberg Global Aggregate Total Return USD Unhedged index, JAGG aims to outperform with the stock-picking prowess of the team that runs the $11bn JPM Global Aggregate Bond fund.
According to the group, integrating an active strategy into fixed income ETFs allows it to allocate toward higher-quality sectors, meaning it can negate the traditional bias that bond indices have towards the largest bond issuers versus those with the healthier balance sheet.
In theory, this benefit should act as a buffer for the ETF in periods of market stress and adjust for interest rate exposure over the cycle.
JAGG aims to capture the diversity of the flagship Bloomberg index by tracking significantly fewer stocks than its passively managed counterparts, comprised of 168 holdings versus 13,642 for the $8.4bn iShares Core Global Aggregate Bond UCITS ETF (AGGG).
Despite investing in significantly fewer stocks, the ETF still manages to encapsulate the beauty of the global aggregate index, offering exposure to government, corporate, government-related, emerging market and securitised bonds across 25 local currency markets.
While potentially increasing the ETF’s idiosyncratic risk, JAGG’s tilt to quality should give investors peace of mind should markets become volatile.
The ETF has not yet generated a long enough track record to test this theory but has marginally been the best-performing global aggregate ETF over the past month, returning 4.5% versus 4.4% for AGGG and the Xtrackers ESG Global Aggregate Bond UCITS ETF (XBAG).
Taking a look at JPMAM's mutual fund version, the fund has returned -17.9% and -3% on a three and five year basis.
Going up against industry behemoths in the global aggregate space, JAGG’s future popularity could be an interesting barometer for how active ETFs fair over the coming years, with its ability to take market share from its purely passive rivals likely to be closely scrutinised.
For this reason, JAGG gets my vote for one of the more interesting launches of 2023.