This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Scott Kubie, chief strategist of Omaha, Nebraska-based CLS Investments.
There has been a wave of attractive, international smart-beta ETFs launched in recent years, and the JP Morgan Diversified Return International Equity ETF (JPIN | D-52) (in addition to having a very long name!) is a prime example.
Its goal is to provide a somewhat-smoother ride to international portfolios, while allowing exposure to attractive smart-beta factors to boost risk-adjusted returns. When looking at international factor ETFs, this one should be on the short list of choices.
Performance
So far, JPIN has delivered on its promise. Its returns are more than 3% ahead of its benchmark since inception, and its market risk is 8% lower than the benchmark. Because international markets have been down since JPIN was launched, we would expect some outperformance from a less risky ETF.
To get a better idea of how the ETF has performed, we broke its performance track record down into two parts: the results from inception (Nov. 7, 2014) to May 21, 2015, a near-term market top; and the results from that point forward.
In the first period, the ETF rose 10.0%, while the index trailed slightly, at 9.7%. Since markets reversed in May 2015, JPIN fell 13.5%, while the index dropped 17.1%. In its short history, JPIN has maintained pace in positive markets, while gaining ground in declining markets.
| ETF/Index | Return: 2014-11-05 to 2016-01-21 |
Return: 2014-11-05 to 2015-05-21 |
Return: 2015-05-21 to 2016-01-27 |
| JPMorgan Diversified Return Intl Eq ETF | -4.5 | 10.0 | -13.5 |
| FTSE Developed ex North America NR | -7.7 | 9.7 | -17.1 |
Portfolio Construction
Investors should put extra effort into understanding JPIN. It uses multiple construction techniques, which causes its allocation to vary from the benchmark more than most ETFs. Where JPIN differs from other ETFs is in its risk-weighted approach to regions and sectors.
The international markets are divided into four regions: the U.K.; Europe ex-U.K.; Japan; and Pacific ex-Japan (sorry, Canada.) Within each of the four regions are the 10 sectors. That creates a grid of 40 different region-sector combinations. JPIN allocates roughly the same risk to each of those 40 combinations. When I visualize it, I think of ice cube trays. Each of the 40 holes gets the same amount of liquid (risk) poured into them.
Its approach to selecting securities is similar to other multifactor smart-beta ETFs. JPIN emphasizes four factors in selecting stocks:
- Value
- Momentum
- Size
- Low volatility
The factors are meant to balance the portfolio. Momentum counteracts the biases of value, and the risk of emphasizing smaller-capitalization stocks is offset by the reduced risk of low-volatility stocks.
