JP Morgan to launch fixed income ETFs in Europe; includes smart beta play

Jan 26th, 2018 | By | Category: Fixed Income

JP Morgan Asset Management (JPMAM) has announced plans to launch a trio of bond ETFs on the London Stock Exchange, marking the introduction of the first JP Morgan-branded fixed income ETFs in Europe.

Bryon Lake, international head of ETFs, JP Morgan Asset Management.

Bryon Lake, international head of ETFs, JP Morgan Asset Management.

The three ETFs include a smart beta take on US dollar-denominated emerging market bonds, plus an ultra-short government and corporate bond product, and a short-duration European government bond offering.

They are due to launch on 22 February 2018, with cross-listings on additional European stock exchanges expected to follow in due course.

Bryon Lake, international head of ETFs at JPMAM, commented, “As part of the continued growth and evolution of our ETF business, we’re pleased to be launching our first fixed income ETFs in Europe, offering investors access to our well-established fixed income expertise. We’re focused on launching products which will serve specific investor needs. Sophisticated investors, across Europe, are saying they want to see innovation in the fixed income arena whether that be our beta builder, smart beta and/or active capabilities.”

Lake added, “Fixed income ETFs continue to be amongst the fastest growing areas of the ETF industry, a momentum which we expect to continue as these products mature and evolve. Fixed income ETFs offer lower-cost, convenience, transparency and intra-day access and can be used to help build more robust portfolios and solve for a variety of investment needs.”

The JP Morgan USD Emerging Markets Sovereign Bond UCITS ETF (JPMB LN) will track a new index – the JPM Emerging Market Risk-Aware Bond Index – created by the firm’s Quantitative Beta Strategies team and derived from the flagship JP Morgan EMBI Global Diversified Index. JPMAM has said that the fund will provide smart beta exposure to US dollar-denominated sovereign debt across emerging markets.

The index uses a rules-based filtering and alternative risk weighting three-step process. The first step seeks to achieve a more liquid subset of the starting universe by filtering out instruments with smaller face amounts outstanding and those that are closer to maturity. The second step seeks to limit country-specific risk by removing those countries with the highest spread risk. Finally, the third step seeks to reallocate the remaining countries to target a stable allocation of spread risk from its investment grade and high yield sub-components.

According to JPMAM, the screening and weighting process enhances diversification and gears the index towards managers who want diversification or those who face limitations on the amount of portfolio exposure they can take to individual issuers.

Niels Schuehle and Eric Isenberg, co-portfolio managers of JPMB, said, “Investors who embraced the smart beta approach to investing in equities are increasingly aware of the inadequacies of their traditional fixed income benchmarks. We expect alternatively weighted fixed income strategies to be a significant growth area for bond investors.”

In explaining the rationale behind JPMB’s rules-based strategy, Schuehle and Isenberg added: “The index construction seeks to address three key considerations of investors in emerging market sovereign debt. Namely investability, tail/event risk, and accessing the credit component of emerging market debt. We seek to reduce risk by screening out countries that may be at greater risk of default.

“The index is then weighted to provide clients with more consistent risk exposure to EM credit over time. The result is a product that provides investors improved access to the credit component of the asset class without exposure to the riskiest countries.”

The ETF will have a total expense ratio (TER) of 0.39%.

The JP Morgan USD Ultra Short Income UCITS ETF (JPST LN) will provide actively managed exposure to very short maturity bonds (targeting portfolio duration of less than one year) across investment-grade corporate bonds and government debt. While the strategy can invest across sectors, the five-strong investment team – led by David Martucci, global head of the JP Morgan Global Liquidity Managed Reserves team and portfolio manager – will primarily focus on corporate and investment-grade credit.

“Managing liquidity is a key priority for a number of our clients,” said Lake. “This strategy takes a similar approach to a money market fund, in terms of having a foremost focus on capital preservation but it also incrementally extends maturities to generate slightly higher returns relative to money market funds, whilst still keeping a discipline on risk management.

“Tapping into a long-standing investment capability within our Global Liquidity offering, making this strategy available in an ETF provides another investment option to meet our clients’ evolving needs.”

The ETF has a return target of 0.40-0.60% over money market funds and a TER of 0.18% due to a contractual fee waiver in place until March 2021. Its gross expense ratio is 0.22%.

The JP Morgan BetaBuilders Eur Govt Bond 1-3yr UCITS ETF (JE13 LN), also designed by JPMAM’s Quantitative Beta Strategies team, will track the JP Morgan EMU Government Bond 1-3 Year Index, providing exposure to eligible fixed rate euro-denominated domestic government debt issued by euro zone countries whose bonds are maturing within the next one to three years.

The EMU index only includes liquid, bullet, fixed-rate coupon instruments. As of 30 November 2017, it had 68 bonds from ten countries, the largest country contributors being France (24.6%), Italy (23.0%), Germany (19.8%) and Spain (14.1%). The index maintains an investment-grade composite credit rating of A+, and the average index yield is -0.47% with an average duration of 1.98 years.

Massimo Greco, head of European funds at JPMAM, commented, “For those investors in search of a defensive play and portfolio diversifier, who may be increasingly concerned about an interest rate rise in an environment of potentially rising rates, JPMorgan BetaBuilders Eur Govt Bond 1-3yr UCITS ETF offers a cost-efficient, liquid and transparent way to access relatively short-duration fixed income.”

The fund’s TER is 0.10%.

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