JPMorgan International Bond Opps ETF JPIB

JPMorgan International Bond Opportunities ETF benefits from an experienced management team, the firm’s wider resources, and a flexible and nimble investment process.

In September 2020, JPMorgan Global Bond Opportunities ETF was renamed JPMorgan International Bond Opportunities ETF, reflecting the change in the investment universe from 40% ex US to 80% ex US. The benchmark changed from the Bloomberg Multiverse Index Hedged to USD to the Bloomberg Barclays Multiverse Index ex USA Hedged to USD. The investment process, total return objective, and 5%-10% volatility target remain unchanged.

The strategy aims to maximize total return within its volatility target and retains considerable flexibility to invest across a variety of sectors, such as high-yield and investment-grade corporates, emerging markets, and securitized debt.

Macro decisions are the dominant driver of the process. The comanagers and sector team heads debate the macro environment at quarterly meetings, which define the team’s top-down investment roadmap. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector, which help fine-tune the asset allocation. We have confidence in the team’s ability to proactively reduce risk and modify exposures to limit drawdowns in periods of market stress.

Global fixed-income CIO Bob Michele and international fixed-income CIO Iain Stealey comanage the strategy. But as part of the remit’s transition and in recognition of their contribution three comanagers were added in 2020: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Peter Aspbury, a high-yield portfolio manager who joined in 2010; and Diana Amoa, an emerging-markets portfolio manager who joined the firm in 2015 but left in April 2021. Overall, the strategy benefits from a well-resourced and experienced team.

The ETF has a short track record since the strategy’s transition in September 2020 but outperformed its peers and Morningstar Category index up to the end of March 2024. Its previous version outperformed peers from its inception in 2017 to the time of the transition in September 2020. For most of the time since inception, the large stake in high-yield debt has ranged between 35% and 65%. The bulk of high-yield exposure has stemmed from corporate credit and emerging-markets debt and has been beneficial in a generally benign market environment. The team has exercised sound judgment in reducing that stake when valuations appear less compelling and during periods of market turmoil.

More recently, the fund held up better than most peers during the sharp credit market selloff in first-quarter 2020 as the team reduced its high-yield and emerging-markets exposure, increased duration, and added value with tactical currency trades. In 2022 the ETF declined by 5.9% but outperformed its multisector bond category peers by 3.9% and its Bloomberg US Universal TR Index USD category benchmark by 7.1%. Credit exposures including corporate investment-grade and high yield, as well as emerging-markets debt, detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds, was the main driver of outperformance. A hedging position in Russian credit default swaps also helped at the beginning of 2022. In 2023 the ETF returned 7.8% but underperformed its peers by 0.3% owing to its underweight exposure in riskier parts of the market such as high yield and emerging markets.

The relatively new ETF version uses the same process as the JPMorgan Global Bond Opportunities strategy and has the same volatility target of 5%-10% and total return objective. However, this new version has a different investment universe: 80% ex US rather than 40% previously. Another key difference is that the ETF does not have exposure to loans and convertible bonds(average 5% in the global strategy). Its investment universe still includes a wide range of fixed-income sectors.

Macro decisions are the dominant driver of the process. Quarterly meetings between the comanagers and sector team heads define the top-down investment roadmap. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector and are used in the weekly portfolio strategy meeting to fine-tune the asset allocation. This is driven by each sector’s expected return and conviction level. Sector teams play a vital role in credit selection. The strategy’s broad guidelines include a 75% limit to high-yield exposure, and duration can range from negative 2.0 to positive 8.0 years, but in practice it has never been negative.

As of February 2024, the strategy had a duration of 3.8 years. The bulk of duration comes from exposure to credit (2.3 years) and emerging markets (1.1 years), with 0.1 year coming from securitized. The strategy also has a duration of 0.3 year in government bonds (slightly lower compared with 0.5 year a year ago), which mainly consists of long exposure in German Bunds and Australian and Canadian government bonds.

From an asset-allocation perspective and in line with its new parameters, the fund held 77.5% outside the US, 18.3% in the US, and 4.2% in cash. Corporate credit accounts for 57.6% (from 53.3% a year ago), including 19.3% in high yield and 38.3% in investment-grade. Within high yield, there is a preference toward defensive sectors such as high-quality consumer-oriented companies and select names within telecoms and media. The managers continued to favor investment-grade corporate credit with a roughly similar allocation to a year ago. Since last year, allocations have shifted from high-quality credit to bank capital and corporate hybrids. Exposure to emerging-markets debt stood at 20.8% (about 1.5% higher from a year prior) and included a 14.3% stake in local-currency debt, a 5.1% stake in hard-currency sovereigns, and 1.4% in corporate bonds. Securitized debt accounted for 2.4% (from 4.8% a year ago) using a small part of the fund’s US allowance and consisted of diversified exposure in asset-backed securities and mortgage-backed securities.

The departure of Nicholas Gartside(previously international fixed-income CIO and comanager here) in 2019 didn’t cause disruption, as the presence of Michele and Stealey, both comanagers since inception, ensures continuity.

The managers primarily focus on the fund’s top-down positioning; Michele focuses on US macro, while Stealey is more focused on the non-US side, mainly Europe. They rely on the expertise of JPMorgan’s sector specialist teams for idea generation and security selection across currency, rates, credit, securitized, and emerging-markets debt. As part of the remit’s transition and in recognition of their contributions to idea generation and returns, three comanagers were added in 2020: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Peter Aspbury a European high-yield specialist who joined in 2010; and Diana Amoa, who focuses on emerging-markets and joined in 2015. Amoa left in April 2021, but her departure did not cause any disruption given the team-based approach. Our conviction here is driven by the experience and portfolio management skills of the lead managers, the tenures of the comanagers, and the depth and quality of the available sector team resources. We maintain the People Pillar rating at Above Average.

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.

Its previous version outperformed peers from inception in 2017 up to the time of the transition in September 2020. Over the long term, we expect that the ETF will have a similar return profile to the previous strategy as they follow the same process, have the same risk/ reward targets, and are expected to have similar themes, albeit with a different geographical allocation.

Although asset-allocation moves can be difficult to time, the team here has added value with their calls since inception. In 2017, exposure to US high-yield and emerging markets benefited from the risk-on environment. In 2018, investment-grade and high-yield corporate and emerging-markets bond allocations resulted in negative returns during the fourth-quarter selloff, but in 2019 the strategy benefited from the strong recovery in corporate high-yield and dovish central bank policy in emerging markets. The team has made some deft tactical moves to respond to quickly escalating risks. An example includes the first quarter of 2020: It outperformed peers during the coronavirus crisis as government rates exposure in the US, Canada, and Australia; shorts in emerging-markets currencies; and longs in safe-haven currencies all helped. The year 2022 was another good example of a volatile period during which the strategy managed to contain downside volatility. The ETF declined by 5.9% but outperformed its multisector bond peers by 3.9% and its Bloomberg US Universal Index TR USD category benchmark by 7.1%. Credit exposures including corporate investment-grade and high yield, as well as emerging-markets debt, detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds, was the main driver of outperformance. A hedging position in Russian CDS also helped at the beginning of 2022.

In 2023 the ETF returned 7.8% with exposure to investment-grade corporates, high-yield corporates, and emerging-markets debt contributing to performance. However, it underperformed peers by 0.3% owing to its underweight exposure in riskier parts of the market, such as high yield and emerging markets, driven by the managers’ cautious macroeconomic outlook.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Silver.