Wall St. Titans Gain ETF Foothold

September 20, 2017

J.P. Morgan and Goldman Sachs might not be the first names that come to mind when you think of a major ETF issuer. But these well-established Wall Street giants known for their active-centric, research-driven asset management businesses are making significant inroads into the ETF space in a very short time.

In the past 24 years since the first ETF came to market, this has been an industry dominated by three large issuers—iShares, Vanguard and State Street Global Advisors. Together, these firms manage more than 80% of all U.S.-listed ETF assets.

Their leadership goes uncontested. But that doesn’t mean firms jumping into the ETF pool like J.P. Morgan and Goldman Sachs are fading into the background. Quite the contrary. Working hard to have distinctive, and well-thought-out lineups of ETFs, these new-to-the-space issuers are quickly growing into major ETF players.

Neck-And-Neck In ETF Assets

J.P. Morgan has 15 exchange-traded products commanding more than $5.7 billion in total assets. Goldman Sachs has 13 ETFs with a combined $5.87 billion. With three exceptions—the J.P. Morgan Alerian MLP Index ETN (AMJ), which came to market in 2009, and a pair of Goldman ETNs brought to market in 2007—all of these funds have been in the market less than three years; many are barely two yet.

Both J.P. Morgan and Goldman Sachs have in common a desire to go where the client is, leveraging their in-house investment research capabilities to create ETFs. Both say that demand from their investors for tools such as ETFs is the driving force behind their efforts.

They also share a focus on smart-beta ETF ideas. These issuers aren’t battling for a piece of the S&P 500 market-cap-weighted pie, but they are offering unique takes on the market.

J.P. Morgan

One of the hallmarks of J.P. Morgan’s approach is its focus on risk weighting and factors.

Many of its ETFs are built to avoid risks you’re not compensated for, such as sector and regional tilts, and to “lean into” risks that deliver returns, such as factors. It’s a multilayered, multifactor approach that lends itself to a lower volatility profile while avoiding the cyclicality of a single factor, according to Jillian DelSignore, head of J.P. Morgan’s ETF distribution. 

 

New Heavyweights In Smart Beta ETFs

 

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Consider the J.P. Morgan Diversified Return International Equity ETF (JPIN), J.P. Morgan’s biggest ETF, with just over $1 billion in assets. The popularity of the fund in a way speaks to the firm’s risk- and factor- focused methodology.

Investors are embracing the idea of a smoother ride in often-more-volatile international markets. The iShares MSCI EAFE ETF (EFA), for example, has a beta of 1.03, while JPIN has a beta of 0.89, according to FactSet data. Beta is the measure of a security's risk relative to the broader market. 

JPIN doesn’t necessarily set out to replace core exposures such as EFA, and many investors are using it to complement it, or to complement what active managers offer, DelSignore says. But she notes that the fund’s reach could expand into the core. 

 

 

“We look at building out our ETF suite the way an advisor would think about building out a portfolio—equity, fixed income, alternatives,” DelSignore said.

Put simply, J.P. Morgan’s ETF lineup is built on an alternative-beta foundation.

Funds like the JPMorgan Diversified Alternatives ETF (JPHF), an ETF that’s been dubbed the “hedge fund killer,” navigates that risk premia from alternative exposures that sit somewhere between hedge fund replication on one side and a multimanager approach on the other. These aren’t your vanilla types of portfolios; rather, they’re strategies that—until recently—were hard for many investors to access.

The lineup of J.P. Morgan’s ETFs comes with an average expense ratio of 0.48%, the cheapest costing 0.18%, or $18 per $10,000 invested.

 

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