This article focusses on JPMAM’s new US listings. For the new European equivalents, listed this week (14/12/18), please see this article.
JPMorgan Asset Managment is listing two actively managed bond ETFs in the US, which look to us like the future of bond ETFs.
- JPMorgan U.S. Aggregate Bond ETF (JAGG)
- JPMorgan Corporate Bond Research Enhanced ETF (JIGB)
JAGG will, as its name suggests, invest in the aggregate investment grade US bond market: corporate bonds, US treasuries, and asset and mortgage-backed securities. The fund uses a bottom-up approach, picking bonds based on a two-step process.
First, JPMAM passes a factor screen over the bond universe. The factors JPMAM is interested in are Value, Quality, and Momentum.
Second, it picks bonds so that the fund’s duration and sector exposures are in line with the Bloomberg Barclays US Aggregate Index. At the time of writing that duration is 6 years.
While JAGG shares its fund name with a UK-based mutual fund, it is (judging by the website and prospectus) a very different fund. JPMAM’s website and prospectus indicate that the UK fund has a completely different portfolio management team.
JAGG will charge a mere 0.07%.
JIGB will bring JPMAM’s research powers to bear on investment grade US-dollar denominated corporate bonds from anywhere in the world. The fund aims to beat the Bloomberg Barclays US Corporate Bond Index.
It aims to do this by overweighting bonds from companies with stronger credit scores while underweighting those with weaker credit scores. JPMAM comes up with these credit scores by evaluating companies credit metrics, competitive environment, firm-specific risks, “and other technical factors, such as the liquidity of debt issued by the company and the amount of debt outstanding,” the prospectus says.
The fund also runs a sector analysis which, like the credit scores, looks to overweight better valued more creditworthy sectors.
The fund can also invest in derivatives and cash. The fund’s duration at the time of writing was 7 years, the prospectus indicates. It charges 0.14%.
Analysis — looks like the future of bond ETFs
Fixed income is the future of the ETF industry. Yet to date, most fixed income ETFs have been plagued by three weaknesses:
- Market cap weighting is broken. While weighting companies based on how big their footprint in the market is works for equity, when the same concept is extended to bonds it leads to the “bums problem” — where market-weighted bond indexes end up overloading corporate bums that binge on debt.
- Ratings agencies are untrustworthy. Those who remember the GFC already know this. Yet ETFs too often rely on ratings agencies opinions in building their bond indexes.
- Fixed income ETF fees have been too high. Fees matter triply for fixed income ETFs as their returns are already lower than equity ETFs. This can mean fees take up a higher percentage of an investors return.
Yet today’s listings from JPMAM go some way to addressing these problems.
Both JAGG and JIGB are actively managed, meaning there doesn’t need to be market weighting and the concordant bums problem. The ratings agencies views will be screened by JPMAM’s own fixed income team — a most sensible step given the history. And the fees are low, ensuring investors keep their return.