Checking In On JP Morgan’s ETFs

February 09, 2016

It has been roughly a year and a half since J.P. Morgan first entered the ETF market with the launch of the JPMorgan Diversified Return Global Equity (JPGE | C-73). The huge bank, known largely for its footprint in the actively managed mutual fund space, has since rolled out a few more ETFs, and is now getting ready to debut its first active exchange-traded fund.

We caught up with Robert Deutsch, global head of J.P. Morgan Asset Management’s Exchange-Traded Funds, to talk about how the bank’s ETF effort is going—and what investors should expect from the firm going forward.

ETF.com: JP Morgan first launched ETFs almost 18 months ago. How's it going? Are you finding the traction you expected?

Bob Deutsch: It's going well, largely as we expected it to go. We decided to build products incrementally, one at a time, to get each product right. And we've done that with the five products in the market. We've got several more in filing. And we'd expect to launch an additional six to eight funds in 2016. So, from a product standpoint, I'd say we're largely on track with what we wanted to do.

The performance of the products has been even better than our expectations. They're performing just as designed, but we've designed them to perform well in volatile markets, so the recent environment has been particularly good for them.

ETF.com: Is J.P. Morgan looking to become a big issuer longer term, or are you going to pick some core themes and stay more focused?

Deutsch: It's hard to say you're going to be vast with a dozen products, given that there are a few firms with a couple hundred. But our plan is to do in the ETF business what we've done with our investment management business, our mutual fund business—to have broad investment capability across asset classes. We're going to continue to expand our equity funds, we're going to launch fixed income and we're going to launch alts.

We're building infrastructure to support a large-scale business over time. But we're also not expecting to get there in 2016. This is a long-term build, a big commitment, a multimillion-dollar investment.

ETF.com: You are known as an active manager, but your ETFs so far are passive. How are your active investors embracing this passive move?

Deutsch: When you say “passive,” most investors probably think of traditional index funds—market cap-weighted strategies. We don't have any plans to do traditional index funds.

What we're doing and want to continue to do is to bring our active capability, our active thinking, the research we do in the equity business, the research we do in the fixed-income business into ETFs in different ways.

In some cases, it'll be active in the sense of portfolio managers selecting stocks or bonds to build portfolios. And in some cases—like the portfolios we've done—we'll use our active ideas and insights to build a more systematic, rules-based approach, which the market is generally calling “smart beta.”

So, yes, it's passive, but it's not traditional indexing; it's anything but that. And these products are designed to mitigate some of the risks that we see with traditional indexing. Traditional index funds are not as well-diversified as they might appear on the surface. They own lots of stocks, but that doesn’t mean you’re diversified. It all depends on how you weight those.

What we found is index funds are not terribly well diversified across sectors. For example, if you were to go in the international developed markets today—whether it's FTSE or MSCI—the traditional index would have you over 25% in the financial sector. It seems like a pretty high weighting, and I'm not sure investors want over 25% in financial stocks. The weighting methodology we use mitigates that.

ETF.com: Is smart beta going to take over the core of portfolios?

Deutsch: The funds we built are core. They could replace; they could complement. You could think of it in different ways.

We're not suggesting all traditional index funds should be replaced with these, but these are core products. And they're more core than a minimum-volatility or low-volatility product, which we think can work well in certain environments, but does not work in others. You have to time your way in and out of those.

These products we've produced are core products that should be viewed as long-term holdings.

ETF.com: Is there any spot in the market that you see a particular opportunity right now for innovation, or more product options?

Deutsch: I think the real opportunity is in education on these products. There's a proliferation of products. There are more of these factor products coming. I think advisors are very hungry to understand them, and they need education, they need advice. They need to understand the construction of these funds, and whether they are core or satellite, and how to use them.

To us, that's the opportunity: to talk them through this.

ETF.com: Any challenges to getting into the ETF market you didn't foresee?

Deutsch: There’ve been lots of challenges. I think we got through some of the regulatory aspects fairly well—maybe it wasn’t quite as bad as we anticipated. We also needed to build infrastructure to do it, because we have large portfolio management systems on different platforms. That was challenging, but the build has gone pretty well.

I would say training our mutual fund sales force to understand ETFs took a little longer to do than I had anticipated. It's a different product; it's a different language. You start with beta instead of alpha, and you go from there.

ETF.com: What should we expect to see next from J.P. Morgan’s ETF effort?

Deutsch: We filed our first active fund that's an alt fund. We received our active exemptive relief notice, so that'll be effective in a few weeks. We're also very close to launching two funds we've had in filing for a while.

We've had more creates in the last 30 days than any other 30-day period, so that's been good. And I'm building out my distribution team. We’ve had a few hires. We're starting to ramp up distribution.


Contact Cinthia Murphy at [email protected].

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