Get With the Bull and Defend the Bear With This ETF

  • Slew of multi-factor ETFs have come to market in recent years
  • Some aim to deliver to investors participation in bull markets while defending against retreating equity prices
  • JPUS is one such fund that can be viewed as such as an ETF

A slew of multi-factor exchange traded funds have come to market in recent years, some of which aim to deliver to investors participation in bull markets while defending against retreating equity prices. The JPMorgan Diversified Return US Equity ETF (NYSEArca: JPUS), which debuted in September, can be viewed as such an ETF.

JPUS tries to reflect the performance of the Russell 1000 Diversified Factor Index, which is comprised of U.S. stocks taken from the Russell 1000 index and selects components based on a diversified set of factor characteristics, such as relative valuation, price momentum and quality. Additionally, securities are diversified across industries. The underlying index may also utilize up to 20% of its assets in exchange traded futures to better track the underlying index.

Through its multi-factor indexing methodology, JPUS could provide better risk-adjusted returns than the broader large-cap benchmark. Specifically, its its enhanced indexing process would allow the ETF to exclude expensive, low quality companies with poor momentum.

The ETF “assigns composite style scores to large- and mid-cap U.S. stocks based on their value, momentum, and profitability (return on equity) characteristics. But it measures each stock’s style characteristics relative to its category peers and offers broad exposure to the market, only filtering out the lowest-scoring stocks. In fact, about 82% of its portfolio overlaps with the Russell 1000 Index,” according to a recent Morningstar note.

JPUS is currently positioned defensively with a third of its combined weight allocated to defensive consumer staples and utilities stocks. Healthcare and consumer discretionary names combine for almost 28 percent of the ETF’s weight. Energy, which until recently has been a laggard, is one of the smallest sector weights in JPUS at 3.5 percent.

“The biggest difference is that the JPMorgan fund weights its holdings by the inverse of their volatility during the past year, so that the least volatile stocks receive the largest weightings in the portfolio. This gives the fund a defensive posture that should help it weather market downturns better than most, but it could detract from performance in bull markets,” adds Morningstar.