JP Morgan Asset Management has launched its first fixed income multi-factor ETF in Europe.
The fund is the first fixed income multi-factor ETF offered by JP Morgan in Europe.
The JPMorgan Global High Yield Corporate Bond Multi-Factor UCITS ETF provides exposure to a globally diversified portfolio of high-yield corporate bonds from issuers with strong value, quality, and momentum characteristics.
The fund has listed on the London Stock Exchange in US dollars (JGHY LN) and pound sterling (JGYH LN), and in euros on Deutsche Börse Xetra (JGHY GY) and Borsa Italiana (JGHY IM).
It comes with an expense ratio of 0.35% and has been seeded with $25 million.
Methodology
The fund tracks the proprietary JP Morgan Asset Management Global High Yield Multi-Factor Index, built using insights from the firm’s Quantitative Beta Solutions team.
The index selects its constituents from the ICE BofAML Global High Yield Index which consists of corporate bonds denominated in US dollars, Canadian dollars, pound sterling, or euros that are rated below investment grade and issued in major domestic or Eurobond markets. Securities must have at least 18 months until maturity to be included in the parent index.
The methodology starts by excluding subordinated debt as well as bonds with a credit rating of CC or lower. Bonds from currencies with less than a 5% weight in the parent index are also removed – in practice, this currently excludes bonds denominated in pound sterling and Canadian dollars.
Remaining constituents are assigned multi-factor scores based on a proprietary analysis of the firm’s exposure to value, quality, and momentum factor risk premia.
The index uses an optimization process to select and weight bonds so as to maximize the aggregate multi-factor score while maintaining sector and currency exposures similar to the parent index, capping bond and company weights, and limiting turnover. Index rebalancing occurs on a monthly basis.
According to JP Morgan, by combining multiple factors into its selection methodology, the index aims to improve diversification, lower volatility, and reduce exposure to unrewarded risks that are inherent in traditional debt-weighted bond indices.
The index seeks to achieve these goals while providing investors with a yield comparable to the parent universe. As of the end of 2019, the yield to worst on the index was 5.11% compared to 5.13% for the ICE Global BofAML High Yield Index.
Yazann Romahi, Chief Investment Officer of Quantitative Beta Solutions at JP Morgan Asset Management, commented, “We believe we’re reaching a tipping point for factor investing in fixed income. The investment industry has, for the most part, tended to gravitate towards factor investing within cash equity markets and long-short alternative futures strategies where data has been more readily available. Based on our research, factors like value, quality, and momentum are asset class agnostic and very much alive and present in credit markets.”
Olivier Paquier, Head of ETF Distribution EMEA, at JP Morgan Asset Management, added, “In response to the growth of interest in fixed income factor investing and the ongoing demand for fixed income ETFs, we’ve come up with a solution which offers liquid exposure to the yield and diversification benefits of high yield markets, along with the potential for more attractive risk-adjusted returns. JGHY seeks to offer investors thoughtful exposure to the yield and return potential of global high yield, following several years of innovative research by our Quantitative Beta Solutions team.”