Not all funds are created equal
The Ultrashort category, as defined by Morningstar, includes funds with an interest rate duration of less than one year.1 This broad criterion results in a category that includes a diverse range of over 200 Ultrashort funds, from Treasury bill-only funds (cash2) to funds investing in high yield, funds investing primarily in structured instruments with extension and spread risk, and funds utilizing derivatives in various ways. Given this broad criterion, understanding the underlying fund risks is crucial when selecting an Ultrashort manager. Is the strategy akin to cash, a first step out of cash or a more extended fund?
Understanding Drawdowns: The Role of Spread Duration
Looking at a fund’s historical drawdowns can be a useful measure for understanding the potential downside risk of an investment and for comparing the risk profiles of different investments or portfolios. Why do some managers experience greater drawdowns than others? A key metric for assessing the volatility profile of Ultrashort funds is spread duration, which measures sensitivity to credit spread changes.
In the 2022 drawdown analysis, the effective maturity (serving as a proxy for spread duration) for the funds that reported effective maturity varied from 0.00 yrs to 21.2 yrs, with an average of 2.07 yrs. JPST effective maturity was 0.78 yrs.*
Considerations in Ultrashort Manager Selection
While management of spread duration is essential for controlling volatility, it is not the sole factor influencing Ultrashort volatility. We encourage clients to consider the following questions when selecting an Ultrashort manager:
JPST: A Conservative Approach to Outperforming Cash
The JPMorgan Ultra-Short Income ETF (JPST) adopts a conservative strategy within the Ultrashort category, aiming to outperform cash annually over an economic cycle while minimizing volatility over a recommended minimum holding period of 6-9 months.3 Managed by J.P. Morgan Asset Management’s (JPMAM) Global Liquidity group—the same group behind JPMAM’s cash money market funds (MMFs)—JPST leverages similar best practices from our MMFs, such as investment process, credit process, and internal approved list, and evolves these best practices up the curve to create a more robust set of practices for JPST. Unlike many Ultrashort funds managed by fixed income managers moving down the curve, JPST represents a true first step out of cash.
The Ultrashort category presents a diverse landscape of investment strategies, each with varying levels of risk and return potential. Understanding the nuances of spread duration and other risk factors is crucial for investors seeking to navigate this complex space. The JPMorgan Ultra-Short Income ETF (JPST) exemplifies a conservative approach, consistently delivered top-tier risk-adjusted returns and achieving its goal of outperforming cash since its inception. As investors consider their options within the Ultrashort category, careful evaluation of each fund's strategy and risk profile remains essential to making informed investment decisions.