The advantages of actively managed high yield ETFs

The USD and EUR high yield bond markets present compelling long-term opportunities for investors. However, the asymmetric risk profile of high yield bonds makes active management crucial for investors looking to better navigate the complexities of the high yield landscape. This is because in a normal state of the high yield bond market, our experience suggests that the reward for being long and right on an investment decision rarely compensates for the downside of being long and wrong. Given these dynamics, actively managed high yield ETFs can look to capitalize on market inefficiencies as well as minimize default losses through strong security selection.

High yield bonds are issued by sub-investment grade companies, with credit ratings below BBB-. While high yield bonds, in general, offer higher yields to compensate investors for their increased default risk, the composition and complexity of the market can lead to significant dispersion in the performance across issuers and sectors. This dispersion creates opportunities for active managers to add value through bottom-up, fundamental credit research and disciplined risk management.

Unlike passive strategies that track an index, active high yield ETFs can adjust their portfolios in response to changing market conditions, issuer fundamentals and economic cycles. This flexibility allows active managers to avoid potential pitfalls associated with passive strategies, such as overexposure to the largest (and therefore most indebted) issuers or sectors. 

Passive exposure to highly leveraged companies in secularly challenged businesses, for example, can result in credit loss, whereas active managers can navigate these risks. By focusing on long-term fundamentals rather than short-term market movements, active management can provide a more stable and resilient investment approach.

Active ETFs also provide daily transparency of holdings, which enables investors to easily perform portfolio attribution and analyse their investment’s performance. Furthermore, active ETFs offer intra-day liquidity, which can enhance price discovery in less liquid markets, such as high yield. Since ETFs trade on exchanges, which act as centralised markets to efficiently and transparently match trading partners, an active secondary market can serve as an efficient mechanism for alleviating turnover in the underlying bond portfolio, reducing the need for creating or redeeming shares. Less turnover means less trading costs, which can eat into a fund’s performance. 

Taken together, these features make active high yield ETFs a powerful tool for investors seeking to optimise their fixed income portfolios.

J.P. Morgan Asset Management’s active high yield strategy

At J.P. Morgan Asset Management, our active high yield strategy is founded on proprietary fundamental research and bottom-up security selection. A central tenet is our focus on the imbalance between the risk and reward in high yield bond returns. Given this asymmetric return profile, our emphasis is on downside protection when selecting credits whereby adhering to a rigorous, disciplined and repeatable investment approach along with strong risk management. Our approach does not create structural portfolio biases, such as towards quality or sectors, all while generating alpha from security and sector selection.

This research-driven approach, which has proven successful in identifying undervalued securities in both risk-seeking and risk-averse market environments, is now available to ETF investors with the launch of JPM USD High Yield Bond Active UCITS ETF (JPHY)* and JPM EUR High Yield Bond Active UCITS ETF (JEHY)*.

The benefits of J.P. Morgan’s high yield investment approach 

JPHY and JEHY benefit from active high yield security selection based on a variety of factors, including industry outlook, company financials, management quality and capital structure. This in-depth credit analysis involves engaging with company management, customers and suppliers to gain insights into the issuers that we invest in, as well as comprehensive due diligence.

Our research is complemented by proprietary credit models and industry comparative analyses, which help us to assess relative value and optimise portfolio construction, and is further enhanced by a commitment to assess environmental, social and governance (ESG) risk factors, alongside other relevant factors, as part of our investment decisions. 

While portfolio decision making is ultimately the responsibility of our specialist high yield portfolio managers, JPHY and JEHY employ a team-based (with research analysts, traders and portfolio managers) approach to identify and price the risks associated with every investment we make. We believe this team-based approach is the best way to help ensure that the credit is thoroughly vetted and that the relative valuation makes sense versus other opportunities and sectors. Risk management is embedded in every stage of the portfolio construction process backed by proprietary risk management tools and techniques.

J.P. Morgan Asset Management’s high yield platform

When it comes to choosing an active high yield ETF, manager experience is crucial. At J.P. Morgan Asset Management, as well as having considerable expertise across all major fixed income sectors, including high yield, we are a leading active fixed income manager, with responsibility for over $800 billion in active fixed income assets globally. We are also one of the leading active fixed income ETF managers in the US, with $37 billion in assets under management.

Our high yield platform, which has been in existence since 2004, manages over $58 billion for clients around the world. The platform is backed by a team of dedicated high yield credit research analysts, who are sector specialists and implement a bottom-up approach, focusing on a deep understanding of sector and company fundamentals. 

Our credit research team also has a senior distressed analyst who is a former bankruptcy lawyer with over 26 years of legal experience. The team is led by expert portfolio managers with a proven track record of navigating the complexities of the high yield market and minimising default losses through different market cycles. Also essential to our high yield platform is our team of dedicated high yield traders, which enhances our ability to achieve best execution and source liquidity effectively. 

Our scale provides significant advantages, such as a deep research team, restructuring expertise, advanced portfolio trading capabilities and strong capital markets relationships, enabling us to capitalise on market opportunities and identify under and over-valued securities through proprietary research.

Gain the active edge with J.P. Morgan high yield bond ETFs

Access the attractive total return potential of the high yield bond market with J.P. Morgan’s actively managed high yield bond ETFs, which target income and long-term capital appreciation from either USD or EUR high yield securities, with an emphasis on downside protection.

Key highlights of our active high yield ETFs:

• Target an attractive income: Positioned to generate equity-like returns over the long term, while aiming to deliver above-benchmark performance in both up and down market environments. 
• Benefit from active security selection: Bottomup security selection is powered by fundamental research, backed by the insights of a dedicated team of experienced credit analysts and portfolio managers.
• Seek to minimise drawdowns: Aims to identify mispriced securities and adapt to changes across the market cycle, while actively managing risk at every stage of the investment process to minimise default losses.
• Tap into the insights of an expert team: Our active high yield bond ETFs are managed by a team of high yield specialists with an average of 20+ years experience and a long history of managing high yield portfolios.
• Promote sustainability: Our active high yield bond ETFs are classified as Article 8 funds under the European Union’s SFDR regulation.