JP Morgan Asset Management has launched three fixed income ETFs in Europe designed to offer a better alternative to traditional passive corporate bond strategies.
Bryon Lake, International Head of ETFs at JP Morgan Asset Management.
Enhanced fixed income
The new ‘enhanced index’ funds provide similar risk and portfolio construction characteristics to well-known USD and EUR-denominated corporate bond indices but seek an enhanced level of return through limited active management.
Traditional passive bond ETFs tend to replicate index weights which are determined by the amount of debt outstanding.
Some argue that this style of passive investing can lead to investors owning the most indebted and leveraged of issuers without being adequately compensated for the amount of credit risk they are taking.
To counter this, the portfolio managers at JP Morgan focus on identifying the most attractive opportunities on a risk-adjusted basis based on fundamental research and relative value views. According to JP Morgan, this investment process is grounded in proprietary credit research.
The strategy takes overweight positions in names the credit analysts find attractive and underweight positions in the names they find less attractive. As a result, the strategy maintains index-like characteristics while seeking incremental positive excess returns, compounded over time.
Additionally, the portfolio managers integrate a systematic consideration of ESG investment principles into the portfolio management decision-making process. Companies involved in certain ethically contentious sectors, such as controversial weapons and tobacco, will be excluded.
The ETFs
The JP Morgan EUR Corporate Bond Research Enhanced Index UCITS ETF (JREB LN) is benchmarked against the Bloomberg Barclays Euro Aggregate Corporate Index, a reference for the performance of investment grade, EUR-denominated, fixed rate corporate bonds with maturities greater than one year.
The JP Morgan EUR Corporate Bond 1-5yr Research Enhanced Index UCITS ETF (JR15 LN) is benchmarked against the Bloomberg Barclays Euro Aggregate Corporate 1-5 Index, a narrower version of the above index that includes only those bonds with maturities between one and five years.
And the JP Morgan USD Corporate Bond Research Enhanced Index UCITS ETF (JRUB LN) is benchmarked against the Bloomberg Barclays US Corporate Investment Grade Index, which consists of investment grade, fixed-rate corporate bonds denominated in USD from US and non-US industrial, utility and financial issuers.
All three ETFs come with total expense ratios (TERs) of 0.19%.
‘Intelligent’ selection
Bryon Lake, Head of International ETFs at JP Morgan Asset Management, said, “This is the first time our ESG-integrated corporate research enhanced index (CREI) approach is being made available in a UCITS format. Given our long track record in managing CREI strategies for institutional investors, we’re excited to bring this expertise to the European ETF market.
“Corporate bonds play an integral role in a well-diversified portfolio. However, as we near the end of the credit cycle, avoiding uncompensated risks through intelligent sector and security selection can help deliver even stronger risk-adjusted returns.”
Lake concluded, “In speaking to clients, they want the benefits of passive investing and ETFs but acknowledge that investment grade indices have their limitations. Offering attractively priced investment grade credit active capabilities in the ETF wrapper provides European investors with an interesting alternative.”
The ETFs have been listed on London Stock Exchange, Xetra, and Borsa Italiana.