JPMorgan US Quality Factor ETF JQUA

The portfolio maintains a cost advantage over competitors, priced within the lowest fee quintile among peers.

The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and yield exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Above Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

JPMorgan US Quality Factor ETF earns a High Process Pillar rating.

The main driver of the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The parent firm's impressive risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 3.3 stars, also influences the rating. Strong risk-adjusted performance also supports the process, as shown by the fund's five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk.

This strategy skews toward smaller, higher-growth companies compared with its average peer in the Large Blend Morningstar Category. Analyzing additional factors, the fund has held stocks with higher trading volumes compared to Morningstar Category Peers in the past few years. More-liquid assets are easier to buy and sell without adversely moving their prices and tend to provide some ballast during market selloffs. They also are easier to sell to meet redemptions if a host of investors decide to leave the fund in a short period of time. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy has also displayed a tendency to hold more companies with high dividend or buyback yields than peers over recent years. Higher-yield stocks can provide steady income, but also have their risks. Dividend payers may cut payouts, for instance, if their earnings fall. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Additionally, the managers have consistently taken on more risk, demonstrated by higher volatility exposure than peers. This is a higher-risk, higher-reward approach. In this month, the strategy also had more exposure to the Volatility factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section.

The portfolio is overweight in technology by 4.0 percentage points in terms of assets compared with the category average, and its consumer cyclical allocation is similar to the category. The sectors with low exposure compared to category peers are communication services and industrials, with communication services underweighting the average portfolio by 2.6 percentage points of assets and industrials similar to the average. The strategy owns 280 securities and its assets are more dispersed than peers in the category. In particular, 18.1% of the portfolio's assets are concentrated in the top 10 fund holdings, compared to the category’s 48.5% average. And finally, in terms of portfolio turnover, this fund trades less frequently than the category’s average, potentially limiting costs to investors.

There are four managers listed on the fund: Yazann Romahi, Natalia Zvereva, Joe Staines, Yegang(Steven) Wu. Together, they manage a total of six strategies, with a Gold asset-weighted average Morningstar Medalist Rating, indicating the potential to deliver positive alpha relative to the category median in aggregate. The team has undergone a bout of turnover recently, with Aijaz Hussain leaving within the last five months. Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process.

Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

Over the past three years, it beat the category index, the Russell 1000 Index, by an annualized 2.1 percentage points, and outperformed its average peer by 3.1 percentage points. And more importantly, when extended to a longer time frame, the strategy struggled to separate itself from the pack. On a five-year basis, it matched the index.

The risk-adjusted performance makes a case for this fund. The share class led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. This strategy had more-consistent returns, as denoted by a lower standard deviation, 17.0%, than the benchmark, 18.4%. Finally, the share class proved itself effective by generating positive alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

This share class sits in the cheapest quintile of its Morningstar Category. Its competitive expense ratio, in conjunction with the fund’s People, Process, and Parent Pillars, indicates that this share class has high potential to deliver positive alpha against its category benchmark, leading to its Morningstar Medalist Rating of Gold.