The best of passive and active in a single ETF strategy
Our Research-Enhanced Index Equity (ESG) ETFs blend passive index exposure and active stock selection within a robust environmental, social and governance framework, making them an attractive option for investors looking to earn incremental excess returns on their equity exposure at low active risk.
Time to consider a research-enhanced approach
Whether investors are seeking to de-risk portfolios or looking to perhaps dip their toes back into markets, our Research-Enhanced Index (REI) Equity ETFs provide a cost effective way to gain equity index exposure, with the added benefit of being able to target excess returns by tapping directly into the stock-specific ideas of J.P. Morgan Asset Management’s experienced team of career analysts.
With our hybrid approach, equity investors don’t have to choose between passive index exposure and active security selection—they can have both, supplemented by a value-added focus on sustainability through ESG sector exclusions and corporate engagement.
Cost-effective equity index exposure
We believe equities will remain an important component of overall portfolio returns, particularly in the short term, if stock markets experience a sharp rebound as global economies begin to recover from coronavirus lockdowns. This view is widely held among global equity investors. Some 86% of respondents to our latest quarterly global equity investors’ survey expect equity returns to be above average over the next 18 to 24 months.
Quarterly global equity investors’ survey
Source: J.P. Morgan Asset Management. A subset of survey results are shown for Global Equity Investors Quarterly. Responses received in March 2020. These responses are taken from a quarterly survey representing 36 CIOs and portfolio managers across global equities.
As stock markets recover, our REI Equity strategy is able to provide the cost effective index exposure that investors need. This is because, like passive funds, our REI Equity ETFs stay close to fully invested at all times, with regional, sector and style exposures closely controlled relative to the index to provide a consistent, low tracking error—and a competitive fee.
Incremental excess returns
While equity index exposure remains important in the short term, the contribution from active management is likely to be crucial in the longer term. According to our latest long-term asset class forecasts1, annual equity returns could fall to 5.5% per annum over the next 10 to 15 years— significantly lower than the 7.3% annual return enjoyed over the last 30 years. In a lower return world, the excess returns produced from active management can make a larger contribution to overall equity performance.
We believe our REI Equity ETFs are particularly well placed to generate the long-term excess returns that investors need. Unlike index funds, they are able to take many small overweight positions, driven by the proprietary stock insights of our experienced team of equity research analysts. Our analysts base their stock valuations on sustainable long-term earnings, allowing them to look through the current crisis to identify companies that look undervalued at today’s stock price. The goal is to maximise these stock-specific opportunities, while minimising uncompensated market, sector and style risks.
The opportunities for our analysts to identify undervalued stocks and to generate excess returns look particularly strong in today’s markets. The Covid-19 crisis has exacerbated the recent trend towards large-cap, growth and defensive stocks at the expense of highly leveraged and cyclical stocks, sending valuation spreads (the difference between the most expensive and cheapest stocks in a market or sector) to extreme levels.
We believe this market distortion has created significant share price anomalies that can be exploited through our bottom-up stock research. For example, we are finding significant long-term value in many strong “structurally winning” companies whose share price have been unduly impacted by the sell-off, while we’re mindful of holding companies that are highly leveraged and will struggle to service their debts through a deep recession. In general, our REI equity ETFs are always well balanced and remain focused on maximising their exposure to our analysts’ insights.
Aligned with investor priorities
Another important differentiator of our REI Equity ETFs is our active ESG framework, which plays a critical role in assessing the long-term sustainability of stock returns, and also considers the broader impact of our portfolio holdings with the environmental, social and governance factors that increasingly matter to investors.
We employ a two-tiered approach to incorporating ESG, using values/ norms-based screens to exclude tobacco, thermal coal, controversial weapons and weapons producers, while also systematically and explicitly considering ESG factors in all our investment decisions and encouraging best practices through company engagement.
We believe that the consideration of ESG factors can add significant long-term value. ESG factors can impact corporate revenues, costs and operating cash flows, while poor ESG practices can erode the value of assets and limit access to financing.
Versatile funds with strong performance track records
Our Research-Enhanced Index ETFs span four regions, allowing investors to gain cost-effective and efficient exposure to all major stock markets:
- JREG: JPM Global Research Enhanced Index (ESG) UCITS ETF
- JREU: JPM US Research Enhanced Index (ESG) UCITS ETF
- JREE: JPM Europe Research Enhanced Index (ESG) UCITS ETF
- JREM: JPM Emerging markets Research Enhanced Index (ESG) UCITS ETF
Each fund incorporates the research insights of approximately 80 fundamental equity analysts and benefits from an investment research process that has been sharpened for over 30 years. While past performance should not be used as an indicator of future returns, all our REI Equity ETFs are outperforming their benchmarks over one year and since inception, and in most cases with less volatility and lower maximum drawdowns.
In the near term, we believe our REI equity ETFs can help investors maintain or rebuild equity exposure to capture upside from a potential recovery rally. Longer term, we think their ability to generate incremental excess returns will be critical for investors to boost expected low returns across most asset classes. It’s this ability to differentiate through in-depth research, while also providing efficient index exposure,that really sets our REI Equity ETFs apart.
Find out how our REI Equity (ESG) ETFs have the ability to provide cost-effective and efficient equity index exposure and generate incremental excess returns within a robust ESG framework.
1 J.P. Morgan Asset Management 2020 Long-Term Capital Market Assumptions.