JPMorgan Limited Duration Bond ETF JPLD

JPMorgan Limited Duration’s seasoned managers bring extensive securitized debt experience. This team and vast supporting cast execute a disciplined, value-driven process, earning an upgraded People Pillar rating.

Effective July 31, 2023, JPMorgan Limited Duration Bond converted to JPMorgan Limited Duration Bond ETF JPLD. The exchange-traded fund assumed the mutual fund's performance history since its February 1993, inception. This conversion did not change the team’s approach.

Comanagers Michael Sais and Bob Manning each bring decades of experience, but they don’t do it alone. A deep supporting lineup of managers, research analysts, and traders propel this strategy’s People rating to High from Above Average. They consistently execute this straightforward approach that emphasizes short-term mortgage- and asset-backed securities, but their expertise in sourcing and selecting various agency MBS structures stands out. Alongside the managers, seven securitized analysts and large corporate credit research teams help with bottom-up research.

The ETF forges its own path. Stringent security selection and stable duration highlight the strategy’s approach, resulting in a less volatile offering than peers. The Bloomberg 1-3 Year US Government/Credit Index, which features U.S. Treasuries and agency debt (70%) and investment-grade corporates (30%), is only a loose proxy. Instead, the ETF features securitized debt of various structures designed to offer an attractive yield and stable duration profile, limiting extension in periods of rising yields. While the process considers macro themes, bottom-up security selection drives portfolio construction. Low-yielding U.S. Treasuries don’t show up here; instead, nonagency MBS, commercial MBS, ABS, and collateralized loan obligations (40%-80% of assets) and agency MBS and collateralized mortgage obligations (25%-50%) constitute the bulk of the portfolio, while investment-grade credit plays a supporting role (0%-15%).

This is a lower risk short-term bond offering versus peers, yet it has an enviable long-term record. Over the past 15 years, its 2.7% annualized gain through August 2023 beat its unique short-term bond Morningstar Category median peer’s 2.2% and Bloomberg 1-3 Year U.S. Government/Credit Index’s 1.5%. This result landed near the category’s top quartile. Its Sharpe ratio, a measure of returns relative to standard deviation, was also solid, among the upper third of category rivals.

The Bloomberg 1-3 Year US Government/Credit Index, which features U.S. Treasuries and agency debt (70%) and investment-grade corporates (30%), is only a loose proxy for this ETF. The process begins with JPMorgan’s quarterly investment meeting that sets macro themes for the subsequent three to six months, but bottom-up security selection drives portfolio construction. The managers avoid low-yielding U.S. Treasuries in favor of securitized bonds and corporates. Nonagency MBS, CMBS, ABS, and CLOs (40%-80% of assets) and agency MBS and CMOs (25%-50%) make up the bulk of the portfolio, while investment-grade credit is less impactful (0%-15%).

Diligent security selection is key, and the team is picky about what it owns. For years, it has focused on bonds with better convexity profiles or those that have more stable durations given changes in underlying yields. Examples include CMOs that target specific cash flows, specified MBS pools with distinct underlying characteristics, or shorter-term ABS. Corporate bonds enhance yields and add diversification.

The managers aim to keep duration (a measure of interest-rate sensitivity) within a narrow 1.0-3.0 years band, but typically around 1.5 years, shorter than its index and average peer.

The ETF’s underweighting in corporate credit and shorter-than-peers duration means a lower volatility offering. As of June 2023, the portfolio featured a mix of agency MBS (28.3% of assets), CMBS (19.5%), ABS (17.7%), nonagency MBS (9.1%), corporates (7.3%), and CLOs (5.3%); it eschews low-yielding U.S. Treasuries. This preference has produced a high-quality portfolio relative to peers that feature more corporates, about 43% on average. Its 72% stake in AAA rated bonds is significantly higher than the average peer’s 38%.

The team focuses on bottom-up security selection and sourcing undervalued securities, and it makes modest adjustments to support its prevailing views. When agency MBS spreads tightened in 2020, the managers reduced this allocation to 26% (as of June 2022) from about 41% in early 2020 while at the same time increasing its stake in better-valued nonagency CMBS to 17% from 12%. In 2021, the managers initiated a modest allocation to CLOs as they became more comfortable with the asset class. Given their cautious economic outlook and better value in other sectors, they have gradually reduced corporates to their lowest allocation in over five years to 7.3% (as of June 2023) from over 15%.

The strategy’s duration has stayed rangebound between 1.2 and 1.8 years over the past five years. This is an outlier versus peers, as the ETF’s 1.4-year duration as of June 2023 was more than a year shorter than its median rival.

The veteran managers and collective expertise of JPMorgan’s securitized debt specialists and vast fixed-income resources earn a People Pillar upgrade to High from Above Average.

Mainstays Michael Sais and Bob Manning bring a wealth of experience, especially within securitized sectors. Sais’ JPMorgan career began as an MBS research analyst before joining as a comanager in 1995. Manning’s contributions to the firm’s fixed-income efforts began in 1999; he joined the fund in 2013 to add depth and lessen key-person risk. They know each other well, also comanaging JPMorgan Government Bond HLGAX.

Alongside this duo, the firm’s large network of fixed-income specialists helps guide macro positioning and contribute to bottom-up ideas. Experience matters when sourcing and selecting bonds that meet the managers’ stringent standards. This duo conducts much of their bottom-up research themselves but also draw on specialized portfolio managers and a growing team of securitized analysts. A seven-person securitized research cohort, led by Sajjad Hussain since 2021, is responsible for analysis and monitoring and collaborates with the managers on investment ideas. This tight-knit team jointly makes portfolio decisions and works out any differences in the best interests of the fund.

This team has also been stable, with no turnover of any key contributors over the past five years and plans to add another securitized analyst to the fold. The managers’ personal ownership is meaningful, aligning their ownership interests with investors. Sais’ personal stake in the fund exceeds $1 million, with Manning having at least $500,000.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Driven by strong security selection, the fund’s structural biases to securitized debt versus its index gives it a yield advantage, though lower than its typical peer that features more corporates.

Over the past 15 years, the ETF’s 2.7% annualized return through August 2023 beat its unique short-term bond category median peer’s 2.2% and the Bloomberg 1-3 Year US Government/Credit Index’s 1.5%. This result landed near the category’s top quartile. Its Sharpe ratio, a measure of returns relative to standard deviation, was also solid, among the upper third of category rivals.

Higher-quality and shorter-duration biases has resulted in a less volatile offering than peers. Over the trailing 10 years, the fund’s 1.6% annualized standard deviation was among the lowest among its unique short-term peers. This especially shows in stress periods, like when corporate spreads widened in 2018’s fourth quarter when the strategy’s 0.8% was better than the median peer’s 0.6%. Differences from peers are even more apparent during different interest-rate regimes. In 2022, When the Russia-Ukraine conflict prompted inflation concerns and fueled higher yields, this strategy’s 2.0% calendar-year loss was less severe than its median peer’s 2.7% setback.

As yields continue to rise, this fund shines. For the year to date through August 2023, the fund’s 3.2% return was slightly better than its benchmark and median peer’s 1.9% and 2.7% gains, respectively, once again driven by less interest-rate risk.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Gold.