Why invest in ultra-short, active strategies in today’s markets
05/26/2020
On one end of the income spectrum are cash instruments with low yields. On the other end are bonds with long durations. In between are two actively managed strategies now offering an attractive “middle ground” for investors – J.P. Morgan’s Ultra-Short Income ETF (JPST) and Ultra-Short Municipal Income ETF (JMST).
Guiding investors through COVID-19
With their focus on current income and active risk management, both ETFs have helped shareholders keep their portfolios afloat during the global pandemic. Extreme spread widening in March allowed managers to add yield at bargain valuations. Since then, liquidity has returned to corporate and municipal bond markets, investor demand is once again strong and spreads have tightened considerably.
To date, we haven’t yet felt the full economic and market effects of COVID-19. Although not immune to the challenges, the front end of the yield curve – where we invest – looks well-positioned to provide investors with the potential for income and diversification they seek in uncertain times.
Why ultra-short? Why active? Why now?
- The curve is flatter. With 10-year Treasury yields near all-time lows, an already-flat curve has gotten even flatter. For ultra-short strategies like JPST and its federally tax-exempt counterpart JMST, that means more compelling yield-to-duration profiles than longer-dated bonds.
- The Fed is on hold. After cutting overnight rates to near zero in March, the Federal Reserve has shown no signs of reversing course anytime soon. The move leaves cash investors with low yields for the foreseeable future and makes our ETFs increasingly attractive income alternatives. With Fed rate hikes unlikely, managers can inch out further along the curve to pick up extra yield while staying within duration targets.
- Bond selection is paramount. Some sectors and issuers are clearly under more pressure than others, given the macroeconomic consequences of COVID-19. Instead of passively tracking benchmarks, JPST and JMST actively identify financially strong, fundamentally sound securities while underweighting or avoiding those considered less attractive – for example, bonds tied closely to consumers or energy.
Both strategies rely on proprietary, bottom-up research and experienced management to pursue income while minimizing credit and interest rate exposures. Both take a conservative approach in targeting high-quality securities and ultra-short durations. And both are priced at just 18 basis points to bring investors fully active solutions in low-cost, liquid ETF wrappers.
Two ways to use JPST and JMST in portfolios
- Step up from cash to seek higher income. Stepping out from cash on the yield curve is an opportunity to both increase monthly income and take advantage of active investing in the broader ultra-short space. Our strategies, JPST and JMST have outyielding taxable1 and tax-exempt2 money market funds, respectively.
- Step down from longer-term bonds to reduce risk. With today’s flat curve, ultra-short ETFs tend to generate higher yields than traditional income sources with reduced rate risks. For example, JPST and JMST have both had durations of less than one year, which is shorter than the Bloomberg Barclays U.S. Aggregate Index and 10-year Treasury.
Looking ahead, we will continue to assess the ongoing impacts of COVID-19 on the economy as well as market liquidity, credit quality and supply-demand dynamics. Through it all, we’ll carefully consider and cautiously capture select opportunities as they arise along the front end of the curve.
1Source: J.P. Morgan Asset Management. All data as of 4/30/20. Yield data displays 30-Day SEC Yield for JPST (unsub. 2.10%) and 30-Day Average Yield for JPM Prime MMF (Capital Shares Class –unsub. 0.78%). 7-day SEC yield as for JPM Prime MMF (Capital Shares Class) was 0.70%. U.S. mutual funds and ETFs are different investment vehicles with differing investment approaches. JPST seeks to provide current income while seeking to maintain a low volatility of principal through investments in investment-grade, U.S. dollar-denominated fixed and floating-rate debt. JPMorgan Prime Money Market Fund seeks current income while seeking to maintain liquidity and a low volatility of principal.
2Source: J.P. Morgan Asset Management. All data as of 4/30/20. Yield data displays 30-Day SEC Yield for JMST (unsub. 1.36%) and 30-Day Average Yield for JPM Tax Free MMF (Institutional Shares Class –unsub. 0.58%). 7-day SEC yield as for JPM Tax Free MMF (Institutional Shares Class) was 0.22%. U.S. mutual funds and ETFs are different investment vehicles with differing investment approaches. JMST seeks to provide current income while seeking to maintain a low volatility of principal through investments in U.S. dollar-denominated fixed and floating-rate municipal debt. JPMorgan Tax Free Money Market Fund seeks current income while seeking to maintain liquidity and a low volatility of principal.
JMST risk summary - The risk of a municipal obligation generally depends on the financial and credit status of the issuer. Changes in a municipality’s financial health may make it difficult for the municipality to make interest and principal payments when due. Under some circumstances, municipal obligations might not pay interest unless the state legislature or municipality authorizes money for that purpose. Municipal obligations may be more susceptible to downgrades or defaults during recessions or similar periods of economic stress.
JPST risk summary - Investments in asset-backed, mortgage-related and mortgage-backed securities are subject to certain risks including prepayment and call risks, resulting in an unexpected capital loss and/or a decrease in the amount of dividends and yield. During periods of difficult credit markets, significant changes in interest rates or deteriorating economic conditions, such securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid.
You could lose money by investing in the Funds. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
The performance quoted is past performance and is not a guarantee of future results. 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 original cost. Current performance may be higher or lower than the performance data shown. For performance current to the most recent month end please call 1-844-4JPM-ETF.