JP Morgan races headlong into smart beta

USA

JP Morgan races headlong into smart beta

Traditionally active money manager and finance powerhouse JP Morgan is racing into the quickly-crowding US smart beta space, listing five ETFs on NYSE Arca. They are:

  • JPMorgan U.S. Dividend ETF                                                                JDIV
  • JPMorgan U.S. Minimum Volatility ETF                                        JMIN
  • JPMorgan U.S. Momentum Factor ETF                                          JMOM
  • JPMorgan U.S. Quality Factor ETF                                                    JQUA
  • JPMorgan U.S. Value Factor ETF                                                        JVAL

All five ETFs track indexes managed by FTSE. And all five use the Russell 1000, a US large and mid-cap index, as their parent index.

JDIV will track companies that pay higher dividends, as is typical of dividend ETFs. JDIV starts by taking the Russell 1000, and chooses the highest dividend yielding sectors in the US economy. Sectors include: financials, technology, consumer services, healthcare, industrials, consumer goods, energy, materials, telecommunication and utilities.

Within each sector, JDIV chooses companies based on their 12-month rolling yield while weighting for risk. As such, certain sectors may be overweighted within the Underlying Index because they include higher dividend yielding companies. There were 211 companies in the index at the time the prospectus was filed.

JMIN choses companies from the Russell 1000 based on low volatility. They are chosen so as to distribute risk among sectors in order to minimize overall portfolio volatility, the prospectus says. Each sector is capped at a minimum of 5% and a maximum of 20%. The sectors JMIN can chose from are the same as JDIV.

JMOM screens the Russell 1000 for momentum. Among all the five ETFs in this listing, the prospectus is most vague about JMOM. The prospectus says only that JMOM choses companies for “positive momentum factor characteristics,” while also diversifying across sectors. How exactly these are measured is not specified.

JQUA screens the Russell 1000 for quality companies, “as measured by profitability, quality of earnings, and solvency,” the prospectus says. Within each sector, individual equity securities are also weighted to ensure diversification. But what weights they are given is not specified.

JVAL uses a “relative valuation factor to identify companies with attractive valuations,” the prospectus says. JVAL is also diversified across sectors.

Principal lists complex multifactor ETF on NASDAQ

Boston-based issuer Principal is listing a new multi-factor ETF on Nasdaq, the Principal International Multi-Factor Index ETF (PXUS).

PXUS will use a complex and multi-layered model to screen companies in the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap Index. (Why Korea is excluded as well as the US I am not quite sure).

In order to ensure liquidity, companies in the lowest 10% by three-month average daily trading volume are excluded from selection. Companies are then chosen based on three factors: value, growth and momentum. Companies that are more liquid and less volatile are given more weight, the prospectus says, although volatility is not quite considered a forth factor.

Value is measured through “shareholder yield”, which ranks securities based on the total shareholder gains from the return of free cash flow, dividends, stock repurchases, and debt reduction.

Growth is measured based on pricing power, “which is the extent to which a company can raise the prices of its products without reducing the demand for them,” the prospectus says.

Momentum is measured by companies’ recent performance relative to their peers.

Companies that rank in the top 20% are included in the Index. Each company’s weight is capped at 1.5%.