Understanding core investments

Core investments are the basic building blocks and the central part around which an investor’s portfolio is built. They are typically long-term investments, broadly diversified, and pursue a strategy of consistent returns.

Over the years, we've seen a trend where investors have turned to passive exchange-traded funds (ETFs) for their core holdings. However, we believe actively managed ETFs can serve this purpose just as effectively.

Filling the core

An index approach to core investment provides broad coverage but can have some drawbacks:

• Exposure risks: Passive ETFs are likely to invest heavily in larger companies, high-performing stocks, and major bond issuers, as these typically constitute a significant part of the index. This could reduce diversification and increase volatility.
• Unintentional gaps or overlap: Investors may miss parts of the market or get unintended exposure. For example, buying both an S&P 500 ETF and a Russell 2000 ETF might overlook US mid-cap stocks.

Actively managed ETFs, as shown in our Explained series, can deviate from an index. Portfolio managers can adjust weightings within certain constraints and focus on drivers of return such as growth prospects and balance sheet strength, making these ETFs a good fit for core investments.

Active ETFs for core strength

While core holdings are meant to be resilient and less exciting, they are critical to the long-term performance of a portfolio. Active ETFs can present core investing attributes and the potential to outperform passive building blocks. With their nimbleness and flexibility, they can be used to:

• Combine active ETFs with an existing passive core: This strategy leverages the strengths of both active and passive management to enhance overall portfolio performance.
• Potentially replace passive core building blocks: Portfolio managers typically outperform an index by adjusting asset allocation—holding larger or smaller proportions of securities than their index representation. This can also be achieved through active ETFs. For example, a core portfolio's global equity exposure can rely on an active US ETF to seek outperformance opportunities instead of a passive US exposure ETF that usually mirrors the index performance.

The rise of active ETFs

Active ETFs have evolved to encompass a variety of strategies, asset classes (such as equity, fixed income, and commodities), as well as investment themes and broad market exposures. They aim to achieve specific outcomes, such as outperforming an index, generating income, actively managing risks, or achieving control in terms of duration, yield, or credit quality, all at a relatively lower cost.

J.P. Morgan Asset Management offers a range of ETFs globally, with 62%¹ of them being actively managed. Our active ETF strategies encompass core exposures, growth, income, and alpha generation opportunities and is backed by our comprehensive research capabilities. JPMAM covers 4,600 companies globally and has a US$420 million research budget².

Investors have increasingly gravitated towards active ETFs. As of September 30, assets under management for active ETFs have surpassed US$1 trillion, accounting for 7% of the total assets under management in ETFs and exchange-traded products (ETPs)³. The number of active ETF launches exceeded those of passive ETFs in 2020, and this trend has persisted since then³.