JPMorgan AM to Transition from Smart Beta ETF to Active Strategy

JPMorgan Asset Management has transformed a smart beta exchange traded fund into an actively managed product, and industry experts anticipate similar moves by other firms.

The $170 million JPMorgan Global High Yield Corporate Bond Multi-Factor Ucits ETF, part of the firm’s Irish-domiciled Icav ETF range, will transition to an active strategy approved by shareholders before the end of August.

According to Ignites Europe, no other Europe-domiciled ETF has made a similar switch.

The JPMorgan ETF previously used a smart beta strategy, utilizing a rules-based passive approach to select securities from the ICE BofAML Global High Yield Index based on value, momentum, and quality characteristics.

This article was originally published by Ignites Europe, a subsidiary of the FT Group.

Experts predict that increased demand for active ETFs may lead more asset managers to transition away from passive and smart beta investment strategies.

According to Morningstar, the smart beta ETF market has been stagnant and difficult to understand. This may create an opportunity for more firms to switch to active approaches.

In the past year, smart beta ETF assets in Europe have decreased by 1%, while active ETF assets have grown by 33%, according to Morningstar data.

Deborah Fuhr, founder of ETFGI, noted that most smart beta inflows have been in high-income equity products, with fixed income products being less common in the space.

Hector McNeil, founder and co-CEO of HanETF, suggests that repurposing an ETF strategy can be beneficial if the fund’s assets exceed $50 million. He also highlights thematic ETFs as a potential area for asset managers to switch from passive to active.

JPMorgan declined to comment on the change in investment policy.

In the US, firms such as Principal Global Investors, WisdomTree, and Franklin Templeton have converted passive ETFs to active strategies in recent years.

According to Fuhr, some asset managers switch to active strategies while still tracking the benchmark but with greater flexibility in holding alternative securities when liquidity issues arise.

While active ETFs are not as common in Europe compared to passive ETFs, they are a growing segment of the market, says Nizam Hamid, an independent ETF and index consultant.

Based on Morningstar data, there are currently 360 active ETFs domiciled in Europe, representing only 0.27% of total assets across ETFs and open-ended funds.

Hamid expects further growth in active ETFs to come from asset managers launching ETF share classes for their mutual fund offerings.

McNeil believes that JPMorgan’s focus on active ETFs aligns with its strengths as an active house, particularly considering the success of active ETFs in the US market.

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Since August 2022, JPMorgan’s active ETF assets in the US have exceeded passive assets, with a total of $67.5 billion compared to $53.3 billion, according to Morningstar.

In Europe, JPMorgan’s ETF range includes $10 billion in active strategies and $4.9 billion in passive strategies, based on Morningstar data.

Fuhr mentioned that concerns over transparency have previously deterred asset managers from launching active ETFs, but recent launches by Capital Group and Dimensional in the US indicate a willingness to embrace fully transparent options despite the availability of semi- or non-transparent ETFs.

Ignites Europe, owned by the FT Group, is a news service tailored to professionals in the asset management industry.