As part of its far-reaching ETF roll out, JP Morgan is listing a new actively managed municipal bond ETF that looks quite like an ETF version of its existing mutual fund. The JPMorgan Municipal ETF (JMUB) will invest in a portfolio of municipal bonds issued by local governments to raise money for various public and private purposes (building schools, etc.) JMUB will mostly invest in investment grade bonds, while up to 10% of the fund’s total assets may be invested in junk.
JP Morgan will use both top-down and bottom-up analyses to pick bonds. The fund will take a long-term value-oriented approach and look for bonds “it believes will perform well over market cycles”. The average dollar-weighted
Analysis – rising rates; mutual fund fees
You can tell a good ETF prospectus because it teaches you things. Some of the things we learned from the JMUB prospectus include the risks of bond investing during times of rising rates. These include extension risk, “which is the risk that the expected maturity of [a bond] will lengthen‚Ä¶ due to a decrease in prepayments. As a result‚Ä¶ the Fund may exhibit additional volatility.”
As well as the (relatively) declining capacity of bond dealers’ to market make. This is because their market making capacity has not kept pace with the growth of the global bond market, meaning “liquidity and valuation risk may be magnified in a rising interest rate environment”.
If we had an issue with the fund it’s the performance and fees of the original mutual fund. According to JP Morgan’s website, the mutual fund version of this ETF charges a maximum of 1.04% (more than double the ETF). The high fee comes despite it getting trounced by its benchmark almost every year since inception. The good news is that with an ETF version, fees will be lower and the chance of beating the benchmark proportionately higher.