JPMorgan AM Dumps Smart Beta ETFs: Take a Sneak Peek at Their Sizzling New Active Strategy!

**Title: The Rise of Active ETFs: A Shift in Investment Strategies**

Introduction:
Exchange-traded funds (ETFs) have gained tremendous popularity among investors in recent years, offering a convenient and diversified way to invest in various asset classes. Traditionally, ETFs have been associated with passive investment strategies, mirroring an index’s performance. However, a new trend is emerging in the ETF market as more asset managers are considering a shift towards actively managed products. This shift is prompted by the growing demand for active ETFs and the potential benefits they offer. In this article, we will explore the transition of JPMorgan Asset Management’s smart beta ETF to an actively managed product and its implications for the industry.

1. The Changing Landscape of ETFs:
– ETFs have primarily been known for their passive investment strategies, tracking the performance of an underlying index.
– However, the demand for active ETFs is growing, as investors seek more flexibility and potential for outperformance.
– Active ETFs allow portfolio managers to actively select and manage investments, utilizing their expertise and generating alpha.

2. JPMorgan’s Transition to Active Management:
– JPMorgan Asset Management recently converted its $170 million Ucits JPMorgan Global High Yield Corporate Bond Multi-Factor ETF from a smart beta strategy to an actively managed approach.
– The transition aims to enhance the fund’s performance potential by utilizing active investment strategies.
– This move by JPMorgan is expected to pave the way for other asset managers to follow suit and explore similar shifts.

3. The Potential Benefits of Active ETFs:
– Active ETFs offer the potential for higher returns compared to traditional passive ETFs.
– Portfolio managers have the flexibility to adjust holdings based on market conditions and their investment insights.
– Active management may be particularly beneficial in certain asset classes or during market downturns when active decision-making can help navigate volatile markets.

4. The Challenges of Active ETFs:
– There are some challenges associated with active ETFs, such as higher expenses due to active management fees.
– Active ETFs also face potential liquidity issues, as active strategies may require more frequent buying and selling of securities.
– Transparency is another consideration, with active managers disclosing their holdings more frequently than traditional mutual funds but less frequently than passive ETFs.

5. The Growth of Active ETFs:
– The smart beta ETF market has experienced limited growth recently, leading experts to suggest that active ETFs could be the way forward.
– Assets in European-domiciled smart beta ETFs decreased by 1% in the past year, while active ETF assets grew by 33%.
– The shift towards active ETFs is expected to be more prominent in high-income equity products.

6. Potential Areas for Active ETF Growth:
– Repurposing ETF strategies can make sense for those with assets over $50 million, allowing asset managers to reinvigorate their products.
– Thematic ETFs, focusing on specific investment themes or trends, could also be an area for asset managers to explore active management.

7. International Comparison of Active ETFs:
– Active ETFs are more prevalent in the United States, where they have gained significant market share.
– In Europe, active ETFs account for a smaller percentage of assets compared to passive ETFs but are expected to grow as more asset managers enter the market.

8. Transparency and Innovation in Active ETFs:
– Concerns about transparency have historically hindered the launch of active ETFs, but recent developments have addressed these concerns.
– Fully transparent active ETFs have been introduced in the US, even amidst the availability of semi- or non-transparent structures.
– Capital Group and Dimensional are examples of asset managers embracing transparency in their active ETF offerings.

9. JPMorgan’s Success and the Future of Active ETFs:
– JPMorgan’s success in active ETFs in the US market has laid the foundation for its expansion into Europe.
– The asset manager’s transition to active management reflects its confidence in the potential of active ETFs and tailors its strengths as an active company.
– As the active ETF market continues to grow, more asset managers are expected to join the trend and launch ETF share classes for their mutual fund ranges.

Conclusion:

The rise of active ETFs signifies a shift in investment strategies, providing investors with alternatives to traditional passive index-tracking ETFs. JPMorgan’s transition to active management for one of its ETFs highlights the growing demand for active strategies and the potential benefits they offer. As investors seek higher returns and more flexibility, active ETFs have emerged as a viable solution. While challenges such as higher expenses and liquidity concerns remain, the industry’s innovation and adaptability are addressing these issues. Active ETFs are positioned to play a significant role in the future of the ETF market, offering investors the opportunity to achieve their investment goals with expertly managed portfolios.

Summary:

JPMorgan Asset Management’s decision to convert one of its smart beta ETFs to an actively managed product reflects the industry’s shift towards active ETF strategies. Active ETFs have gained traction due to their potential for higher returns and flexibility in investment decision-making. Despite challenges such as higher costs and potential liquidity issues, the active ETF market is expected to grow, particularly in high-income equity products and thematic ETFs. With the success of active ETFs in the US market, more asset managers are likely to embrace this trend by launching ETF share classes for their mutual fund ranges. The rise of active ETFs marks a new era in the ETF industry, offering investors additional options to achieve their financial objectives.

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JPMorgan Asset Management has turned a smart beta exchange traded fund into an actively managed product, with experts suggesting more companies will follow suit.

Shareholders recently approved the transition of the $170 million Ucits JPMorgan Global High Yield Corporate Bond Multi-Factor ETF into an active strategy, with the changes expected to take effect by the end of August. The fund is part of the firm’s range of Irish-domiciled ICAV ETFs.

Industry experts contacted by Ignites Europe were unable to provide examples of another European-domiciled ETF making a similar switch.

The JPMorgan ETF had adopted a smart beta strategy, meaning it used a passive rules-based strategy to select stocks in the ICE BofAML Global High Yield Index with value, momentum and quality characteristics.

This article was previously published by Set Europe on firetitle owned by the FT Group.

According to experts, the growing demand for active ETFs could prompt more asset managers to abandon products with passive investment policies and smart betas.

The smart beta ETF market “hasn’t been easily understood” and “has been stagnant for a few years now,” said Jose Garcia Zarate, associate director of passive strategy manager research at Morningstar.

It could therefore be an avenue for further strategy shifts towards an active approach, said Garcia Zarate.

Assets in European-domiciled smart beta ETFs fell 1% over the past year, from $102.3 billion in July 2022 to $101.2 billion in July 2023, according to Morningstar data. active ETF assets grew 33%, from $27 billion to $36 billion.

Most of the smart beta inflows have been in high-income equity products, says Deborah Fuhr, founder of ETFGI, an ETF research firm.

Fixed-income products aren’t very common in smart beta, he said.

Repurposing an ETF strategy can make sense if it has assets over $50 million, said Hector McNeil, founder and co-CEO of HanETF.

Some asset managers may be able to “reinvigorate” smart beta ETFs by switching to an active investing approach, McNeil said.

Thematic ETFs could be another area where asset managers could look to move from passive to active, he added.

JPMorgan declined to comment on the change in investment policy.

In the US, firms including Principal Global Investors, WisdomTree and Franklin Templeton have converted passive ETFs to active strategies in recent years.

Some asset managers switch from passive to active with the intention of continuing to track the benchmark, albeit with fewer constraints, Fuhr said.

Such ETFs have more flexibility to hold an alternative security, for example, if there are liquidity issues with an index component, he added.

Active ETFs aren’t as common in Europe, but they represent a growing part of the ETF market, said Nizam Hamid, an independent ETF and indices consultant.

According to Morningstar data, there are only 360 active ETFs domiciled in Europe compared to 2,302 passive ETFs. As the data shows, active ETFs account for just 0.27% of assets between ETFs and open-ended funds.

Hamid expected further active growth in ETFs to come from asset managers launching ETF share classes for their mutual fund ranges.

JPMorgan is predominantly an active company, so it makes sense that it would “build on its strengths,” McNeil said.

The asset manager is likely “encouraged” by the success of active ETFs in the US, of which he has been a large part, he added.

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Since August 2022, active ETF assets have surpassed passive assets in JPMorgan’s US tier and now total $67.5 billion, according to Morningstar data. Passive ETFs totaled $53.3 billion in July.

In Europe, JPMorgan’s ETF range includes $10 billion in active strategies compared to $4.9 billion in passive strategies, Morningstar data shows.

In the past, concerns about transparency have deterred some asset managers from launching active products like ETFs because they were concerned about front running or revealing their “secret sauce,” Fuhr said.

But he pointed out that both Capital Group and Dimensional recently launched fully transparent, active ETFs in the US, despite the jurisdiction now allowing semi- or non-transparent ETFs.

Ignites Europe is a news service published by FT Specialist for professionals working in the wealth management industry. Trials and subscriptions are available at igniteseurope.com.

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