JPMorgan Diversified Return U.S. Equity ETF JPUS avoids concentration and bends toward valuable risk factors, but its unique construction introduces risks that can get in their way.
The JPMorgan Diversified Factor US Equity Index underpinning this fund targets stocks with the best combination of value, momentum, and quality characteristics. With robust track records of market-beating returns, these risk factors are a worthy pursuit. Measuring stocks’ collective traits rather than building separate sleeves improves factor exposure. Indeed, the fund has effectively channeled the value and quality factors, both of which should enhance returns. Momentum is harder to capture because of inverse-volatility weighting, but it can still filter out risky firms whose prices reflect trouble that their prices don’t.
Diversification across factors and stocks is a priority here. Different risk factors like value and quality tend to excel at different times. The fund’s weighting scheme, which weights sectors by their inverse volatility and stocks near-equally, promotes diversification as well. At the end of November, no sector exceeded consumer staples’ 14% portfolio weighting. The 10 largest holdings constituted 4.6% of the portfolio compared with 17.1% for the Russell 1000 Value Index, its Morningstar Category benchmark. Avoiding concentration should help this fund avoid shocks that hurt only one segment of the market.
This fund’s unique and convoluted construction makes this portfolio look quite different from the category index and broad market. Just 37% of it overlapped with the Russell 1000 Value Index, and just 32% of it with the Russell 1000 Index. Sector biases explain much of the difference. This fund’s utilities, real estate, and consumer staples sectors exceeded the Russell 1000 Value by about 5 percentage points apiece, while it was 12 percentage points underweight in financials. Sector bets do not always work, and they can drown out the effect of factors, which are more reliable performance engines.
That was the case over 2022, a year that should have benefited this inverse-volatility-weighted portfolio and the stability it should confer. Hamstrung by its unfavorable technology and energy allocations, the fund fell 97 basis points further than the Russell 1000 Value Index and ranked within the bottom quartile of large-value peers. The fund’s track record has remained solid since its 2015 inception, but sector risks and complex construction leave doubts over the durability of that strong performance.