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JP Morgan races headlong into smart beta

Traditionally active money manager and finance powerhouse JP Morgan is racing into the quickly-crowding US smart beta space, listing five ETFs on NYSE Arca. They are:

  • JPMorgan U.S. Dividend ETF JDIV
  • JPMorgan U.S. Minimum Volatility ETF JMIN
  • JPMorgan U.S. Momentum Factor ETF JMOM
  • JPMorgan U.S. Quality Factor ETF JQUA
  • JPMorgan U.S. Value Factor ETF JVAL
All five ETFs track indexes managed by FTSE. And all five use the Russell 1000, a US large and mid-cap index, as their parent index.

JDIV will track companies that pay higher dividends, as is typical of dividend ETFs. JDIV starts by taking the Russell 1000, and chooses the highest dividend yielding sectors in the US economy. Sectors include: financials, technology, consumer services, health care, industrials, consumer goods, energy, materials, telecommunication and utilities.

Within each sector, JDIV chooses companies based on their 12-month rolling yield while weighting for risk. As such, certain sectors may be overweighted within the Underlying Index because they include higher dividend yielding companies. There were 211 companies in the index at the time the prospectus was filed.

JMIN choses companies from the Russell 1000 based on low volatility. They are chosen so as to distribute risk among sectors in order to minimize overall portfolio volatility, the prospectus says. Each sector is capped at a minimum of 5% and a maximum of 20%. The sectors JMIN can chose from are the same as JDIV.

JMOM screens the Russell 1000 for momentum. Among all the five ETFs in this listing, the prospectus is most vague about JMOM. The prospectus says only that JMOM choses companies for "positive momentum factor characteristics," while also diversifying across sectors. How exactly these are measured is not specified.

JQUA screens the Russell 1000 for quality companies, "as measured by profitability, quality of earnings, and solvency," the prospectus says. Within each sector, individual equity securities are also weighted to ensure diversification. But what weights they are given is not specified.

JVAL uses a "relative valuation factor to identify companies with attractive valuations," the prospectus says. JVAL is also diversified across sectors.