Maintaining ultra-short income in a volatile world
J.P. Morgan’s ultra-short income ETF (JPST) helps manage risk and return for investors stepping out from cash, as well as investors seeking to reduce their risk profile and move down from fixed income. As we move through the credit cycle, we explain how a focus on active management and proprietary credit research can help ultra-short investors to target incremental risk-adjusted returns, even as markets turn more challenging.
Active security selection
We believe that ultra-short duration portfolios with a conservative, high quality allocation to credit can provide liquidity investors with incremental returns on their strategic cash balances, and fixed income investors with the opportunity to reduce credit risk and interest rate risk while maintaining an attractive yield.
In the current credit environment, with spreads widening along with an increase in credit downgrades as the cycle develops, active security selection and broad diversification across markets and sectors is essential if ultra-short investors are to maintain meaningful credit allocations and manage risk effectively. In contrast passive strategies, by design, replicate the investment universe and in doing so tend to hold large allocations of up to 40%-50% in lower-rated BBB corporates bonds given the significant weight of these securities in today’s global corporate bond markets.
Our ultra-short income ETF (JPST) is managed as part of J.P. Morgan’s $770+ billion Global Liquidity platform. JPST has an active security selection process and rigorous approach to credit risk. We leverage the best practices from our global liquidity platform by only selecting securities from our continuously monitored approved-for-purchase list, which is maintained by our global team of more than 70 in-house credit analysts. The analysts’ ratings drive maximum tenor and concentration limits, allowing JPST to maintain a strategic exposure to credit whilst still seeking to minimize volatility throughout the market cycle.
Up-in-quality focus: Managing credit risk
To manage credit risk, our portfolios target the higher quality issuers. Currently, this means investing only in investment grade securities. As credit risks have risen over the last 12 months, we’ve implemented an “up-in-quality” tilt to further lift the average credit rating of our portfolios. A further way we apply our up-in-quality approach where it makes sense, is by choosing to hold certain lower rated BBB issuers we like in the shorter maturities as commercial paper holdings, in place of holding a longer dated bond out to 5 years of maturity as is permitted by the fund.
Strategic positioning of our ultra-short income ETF
Our ultra-short income ETF is positioned to reflect our three- to six-month strategic view of the macroeconomic outlook. As our sector allocations are driven by our medium-term fundamental cross-sector analysis, we seek to maintain portfolio diversification over the cycle. Given our approach, we do not trade in and out of sectors on a frequent basis, so turnover can be kept relatively low to reduce costs.
In many cases we look to hold securities to maturity. “‘Buy and hold” typically accounts for around two thirds of our portfolio positions. Given our active approach, however, we also seek to substitute bonds to capitalize on curve, new issue or good pricing opportunities.
Seeks to capture yield and manage risk
JPST seeks to provide a highly effective portfolio solution for cash investors looking to enhance returns on their strategic balances, or for fixed income investors looking to reduce credit risk by adding exposure to short maturity bonds.
Our ultra-short income ETF has been running since 2017 when it was launched by the J.P. Morgan Global Liquidity group and is one of the fastest growing ETFs in that market.
Find out more about how this innovative ultra-short ETF combines the advantages of active security selection with the liquidity, cost and transparency benefits of the ETF wrapper by scheduling a call with our team.
RISK SUMMARY— JPST: The following risks could cause the fund to lose money or perform more poorly than other investments. For more complete risk information, see the prospectus. Index returns and sector returns are for illustrative purposes only and do not represent actual Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged. Narrowly focused investments typically exhibit higher volatility. Investing involves risk, including possible loss of principal. Investment returns and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns. Diversification does not guarantee investment returns and does not eliminate the risk of loss. The value of investments in mortgage-related and asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. The securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid. They are also subject to prepayment risk, which occurs when mortgage holders refinance or otherwise repay their loans sooner than expected, creating an early return of principal to holders of the loans. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and decreased trading volume. Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Investments in derivatives may be riskier than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. Income from investments in municipal securities is exempt from federal income tax. The risk of a municipal obligation generally depends on the financial and credit status of the issuer. The Fund will likely engage in active and frequent trading leading to increased portfolio turnover, higher transaction costs, and the possibility of increased capital gains. Securities rated below investment grade are considered "high-yield," "non-investment grade," "below investment-grade," or "junk bonds." They generally are rated in the fifth or lower rating categories of Standard & Poor's and Moody's Investors Service. Although they can provide higher yields than higher rated securities, they can carry greater risk. There is no guarantee the Fund will meet its investment objective. Diversification may not protect against market loss.