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The Federal Reserve’s rate-tightening campaign that commenced in 2022 and lasted until mid-2023 was a boon for cash instruments and ultra-short duration bond funds.
That group includes the JPMorgan Ultra-Short Income ETF (JPST). Just over two months past its seventh birthday, JPST has $24.69 billion in assets under management. Not only does it make it the second-largest ETF in the JPMorgan stable, it makes JPST one of the largest ETFs of any stripe. In fact, just 76 ETFs are larger than JPST as measured by assets under management.
In a high interest rate environment the benefits associated with JPST are clear. As of the end of the second quarter, the ETF’s 30-day SEC yield was 5.38% and the fund’s managers (it’s actively managed) target a duration of less than one year, meaning rate risk is minimal. Plus, the annual fee is just 0.18%, or $18 on a $10,000 stake. That’s decent among actively managed bond ETFs.
Exploring JPST Perks
Yes, bond traders are increasingly wagering on the Federal Reserve soon cutting interest rates. And yes, lower rates would likely be more of a catalyst for longer duration fare over funds such as JPST. Advisors know as much, but JPST has advantages that extend beyond rates. Those include a deeply experienced bench of managers.
“James McNerny has led this offering since its inception and leads this strategy day to day. He joined J.P. Morgan in 2000 and focuses exclusively on short-term strategies,” notes Morningstar’s Paul Olmsted. “McNerny collaborates with managers David Martucci, Cecilia Junker, and Kyongsoo Noh, who average more than 25 years of industry experience. The comanagers also draw on the vast resources of the firm’s Global Fixed Income, Currency, and Commodities platform, which includes 21 investment-grade corporate-bond and eight securitized analysts who inform security selection.”
JPST is also a testament to the rise of actively managed ETFs, particularly bond funds, and it is active management that is the source of some of the fund’s advantages.
“Relative value assessments between traditional cash markets and debt maturing beyond one year, and the outlook for liquidity drive portfolio positioning. This helps the team beat prime money market funds while limiting potential losses and maintaining ample liquidity,” adds Olmsted.
JPST Not Perfect, But It Works
Aiming for perfection is aiming for a moving target and that’s to say that JPST isn’t perfect. As advisors know, strategies such as JPST could be laggards when interest rates and/or when credit risk is in style. Both settings will return at some point.
The important questions are does JPST function as expected when low duration is in style and does the fund deliver the goods over the long-term? There’s good news on both fronts.
“Since the ETF’s May 2017 inception, its 2.5% annualized gain through June 2024 beat its distinct ultrashort bond Morningstar Category peer median’s 2.3%, ranking near the top quartile,” concludes Olmsted. “The strategy’s top-decile volatility-adjusted performance, as measured by Sharpe ratio, was even better. This downside protection was on display in 2022 when rates spiked following the beginning of the Russia-Ukraine war. The ETF’s 0.37% first-quarter loss was less severe than its peer median’s 0.71% drop.”