JPMorgan Diversified Return Intl Eq ETF JPIN

JPMorgan Diversified Return International Equity ETF typically follows the trajectory of a low-risk portfolio, but unintentional risks can derail its performance.

This strategy starts with the FTSE Developed ex North American Index and splits it into four regions and 10 sectors within each region, creating 40 regional sector buckets. It weights each of those segments by the inverse of its historical volatility, pushing the fund toward stable segments of the market and away from those that are more volatile. Within each regional sector, the strategy ranks constituents by their value, momentum, and quality characteristics. It combines these scores into an overall composite score and sweeps the highest-scoring names into the portfolio. Stocks within each regional sector are weighted equally, subject to constraints designed to promote diversification.

This portfolio looks substantially different from the market. It tends to lean toward cheaper stocks and it has a stronger focus on quality than the MSCI ACWI ex USA Value Index. Those characteristics could provide a long-term advantage, but it makes a number of active bets in the process that won't always provide a benefit. It has tended to overweight Japanese stocks and those from the consumer staples sector while underweighting financials.

Weighting each regional sector by the inverse of their recent volatility injects defensive characteristics into the portfolio that tend to dictate its long-term performance. It has tended to outperform the MSCI World ex USA Index, a proxy for its parent universe, during drawdowns but lag during rallies. That aligns with expectations for a defensive portfolio, but unintentional risks can throw it off course. For example, underweighting energy stocks caused it to trail its MSCI ACWI ex USA Value Index Morningstar Category benchmark by 5.2 percentage points in 2022.

The portfolio looks very different from its parent universe, and those deviations may not compensate investors with higher risk-adjusted returns over the long run. It earns an Average Process rating.

The JPMorgan Diversified Factor International Equity Index starts with all stocks in the FTSE Developed ex North America Index and scores each on its value, quality, and momentum characteristics. A composite score for each stock is calculated by equally weighting these individual factor scores.

After scoring stocks, the strategy divides the starting universe into four regions (Japan, Asia ex Japan, UK, and Europe ex UK) and splits each region into its 10 ICB sectors, creating 40 regional-sector buckets. These regional sectors are weighted according to the inverse of their trailing three-year volatility, which tilts the portfolio toward less risky segments of the market. Each bucket then ranks its constituents by their composite factor score and adds names, starting with those having the most attractive scores. The process continues until each bucket holds the top-scoring 70%, or it cannot hold any more names while simultaneously satisfying constraints designed to promote diversification and liquidity. The strategy tries to equally weight stocks in each regional sector, but its diversification and liquidity caps can change those weightings. This final step is an iterative process because capping the weighting of individual stocks can shift the weighting of the regional sector buckets away from their target weightings.

The index rebalances quarterly in March, June, September, and December. The strategy incurs at least 5% turnover at each rebalance. It may require modestly more turnover when regional sector weightings drift too far from their targets.

The portfolio's composition reflects its preference for less volatile segments of the market. It has tended to overweight utilities stocks and underweight financials stocks. It also leans toward those from Japan because their US-dollar-denominated standard deviations have been lower than other regions. The volatility of Japanese stocks has been considerably lower than other regions because the dollar-yen exchange rate was negatively correlated to local Japanese stock returns, meaning yen-denominated returns have been more volatile than dollar-denominated returns.

Low volatility takes center stage in this exchange-traded fund, and it tends to favor cheaper stocks with stronger quality characteristics than the market. Its average profitability, a proxy for quality, has tended to be higher than the MSCI ACWI ex USA Value Index. The strategy doesn’t intentionally target smaller stocks, but equally weighting stocks within each regional sector bucket puts more emphasis on names with smaller market caps. The portfolio’s average market cap has consistently been about one third that of the category index.

The team has remained stable, promoted from within, and continued to build on its existing capabilities. It earns a People Pillar rating upgrade to Above Average from Average.

The funds managed by the team lost two portfolio managers in late 2022. But that hasn’t led to brain drain. Both instances were internal promotions, and those individuals continue to work on the team’s research efforts and refining its workflow.

This relatively small team of about 20 individuals taps into J.P. Morgan’s global infrastructure. The firm’s global trading desks, capital markets experts, and technology staff all play a role in helping managers track each fund’s target index. The team also leverages J.P. Morgan’s Spectrum platform, an all-in-one portfolio management platform that integrates various tools, including risk modeling, order management, and compliance. These resources and capabilities can add incremental value around the edges. For example, managers may ignore index rules within allowable limits and trade around corporate actions when it is cost-effective.

Risk management follows a comprehensive two-pronged approach. The first prong consists of daily portfolio checks that help catch any problems before they emerge. The second prong looks at bigger violations and long-term tracking improvements. Aligning managers' compensation with index tracking performance further ensures that their interests mesh with investors’.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

J.P. Morgan launched it in early 2014 when the market was entering a drawdown. It initially outperformed its MSCI ACWI ex USA Value Index category benchmark by 14.5 percentage points annualized between December 2014 and January 2016. That outperformance aligns with expectations for a low-risk portfolio. It should outperform during drawdowns but fall behind when the market rallies. Along those lines, it also outperformed the category index by 4.7 percentage points over the first three months of 2020. The portfolio’s preference for high-quality companies trading at low multiples was an advantage over those three months.

However, the combination of style, sector, and country bets in this portfolio have occasionally thrown it off course. For example, it lost 5.2 percentage points more than the index in 2022. Differences in sector exposures, including a smaller allocation to energy stocks, explained a large portion of the gap. Short-term hiccups aside, the ETF’s long-term return still came out on top. It beat the MSCI ACWI ex USA Value Index by 69 basis points annualized from its November 2014 launch through August 2024.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Neutral.