JPMorgan Rises on Active ETF Wave

At a time when many investors are turning their backs on traditional, actively managed funds and pouring money into index funds instead, JPMorgan Asset Management has found a different recipe for success.

The giant bank’s mutual fund arm has transformed a niche options-based investment strategy into an exchange-traded fund giant that has raised tens of billions of dollars. That franchise is led by the $35.5 billion JPMorgan Equity Premium Income ETF JEPI, the world’s largest actively managed ETF.

Morningstar analysts say the strong investor interest in JPMorgan’s active ETFs has been complemented by other successes, including a traditional value-stock fund that won the Morningstar Outstanding Portfolio Manager Award this year, strong fixed-income funds and solid growth for the company’s funds outside of Europe.

As a result, in the U.S., JPMorgan Asset Management ranked 11th and became the eighth largest mutual fund firm by assets in 2019. It ranks sixth in terms of ETF assets in the U.S. and second behind Dimensional Financial Advisors in terms of active ETF assets in the U.S.

“There’s no ulterior motive, they’re just doing their job well,” says Paul Olmsted, senior director of fixed-income investment research analyst at Morningstar.

The company is a bit of a rarity among fund companies in that it is a banking conglomerate that is also a player in the fund sector, with $657 billion in U.S. fund assets under management as of the end of August. Competing major banking firms do not have the foothold in the fund sector that JPMorgan has. Goldman Sachs Asset Management is No. 21 with $181 billion, while Morgan Stanley Investment Management is No. 63 with $41 billion (this excludes assets at subsidiaries Eaton Vance, Calvert and Parametric). Other major commercial banks have sold their mutual fund businesses in the years since.

So far in 2024, $22.5 billion has flowed into JPMorgan’s active ETFs, representing 80% of the company’s total U.S. fund flows through the end of August 2024. Along with the JPMorgan Equity Premium Income ETF, the $16.5 billion JPMorgan Nasdaq Equity Premium Income ETF JEPQ has also attracted billions of dollars from investors. More recently, JPMorgan’s other active ETFs have also seen increased interest from investors.

The Rise of Active ETFs and JPMorgan

JPMorgan’s trajectory can be tracked alongside the growth of active ETFs.

For most of their history, ETFs were primarily index-tracking funds. However, the landscape changed significantly in 2019 when the SEC made it easier for fund companies to launch active strategies in the ETF format.

In 2019, active ETFs accounted for 3% of JPMorgan’s U.S. fund assets, slightly higher than the U.S. fund industry. As of August of this year, the firm’s 36 active ETFs accounted for 16.9% of JPMorgan’s total assets, several times the U.S. fund industry average of 2.4%, according to Morningstar Direct.

JPMorgan launched its first U.S. active ETF, the JPMorgan Diversified Alternatives ETF, in 2016, which has since closed. Its previous, still-surviving active ETF, the JPMorgan International Bond Opportunities ETF JPIB, opened in 2017. The bond ETF today has $489 million in assets and has a Morningstar Medal Silver Rating.

The JPMorgan Equity Premium ETF was launched in 2020, just as the active ETF boom began. The company launched the JPMorgan Nasdaq Equity Premium Income ETF in 2022, which recently replaced the Equity Premium ETF as the company’s biggest draw.

“JPMorgan has been a firm that focuses on active ETFs, but they’re not just creating them because they’re the latest fad, they want to make sure they’re thoughtful about it,” Olmsted says.

Option Income Funds Lead the Way

The Equity Premium and Nasdaq Equity Premium ETFs are by far the largest of JPMorgan’s active ETFs. Together, the funds account for nearly half of JPMorgan’s total active ETF assets and 8% of the firm’s total fund assets.

Both funds operate on a strategy that has been around for many years in the form of mutual funds. The strategy involves holding stocks and selling call options. Call options are the right to buy an asset at a certain price. Both funds use derivatives called equity-linked notes that mimic the income from selling call options without actually exercising the options themselves.

The funds have become very attractive for several reasons. Market volatility, which has increased the income from option sales, has increased their yields to the point where they are still very attractive, even though the Fed’s interest rate hikes have increased bond yields.

“The unique structure of JEPI and JEPQ allows them to count all option income toward dividend yields rather than capital gains or capital returns, which have increased over the past few years due to market volatility,” says Lan Anh Tran, a manager research analyst at Morningstar.

This meant that dividend yields were higher than similar funds that distributed some of their income through capital gains distributions and were not counted towards dividend yields.

“Most people look at the dividend yield rather than the overall payout,” Tran says. That is, the fund’s already high yield appeared even greater compared to other funds.

Both funds have been blockbuster successes for JPMorgan. The Equity Premium ETF earned $5.5 billion in 2021 and then about $13 billion in 2022 and 2023. Investor dollars have slowed this year, with the fund earning $2.4 billion through July. Meanwhile, the Nasdaq Premium ETF has soared, earning $6.1 billion in 2024.

The dominance of the two funds was evident in 2023, when Equity Premium and Nasdaq Equity Premium received the most and second-most, respectively, of any active ETF in terms of flows. The two funds accounted for 16.2% of the $121 billion that entered U.S. active ETFs that year. The two funds accounted for 66% of JPMorgan’s U.S. active ETF flows in 2022 and 85% in 2023.

Interest Grows in Other JPMorgan ETFs

While the biggest news about JPMorgan’s active ETFs is its two equity premium income funds, investor interest appears to be growing across the firm’s active ETF range.

In 2024, five of JPMorgan’s active ETFs attracted over $1 billion in flows: JPMorgan Ultra-Short Income ETF JPST, JPMorgan Global Select Equity ETF JGLO, JPMorgan Active Growth ETF JGRO, JPMorgan Core Plus Bond ETF JCPB and JPMorgan Hedged Equity Laddered Overlay ETF HELO.

JPMorgan’s successes don’t stop at equity and derivatives funds. The $48.7 billion JPMorgan Core Bond Fund JCBUX is the 10th largest actively managed bond fund in the U.S., with a Gold Medal Rating from Morningstar.

One feature that sets JPMorgan’s bond funds apart is that they have a centralized platform for fixed-income investments, says Morningstar’s Olmsted, who tracks the JPMorgan Core Bond Fund.

“They call it a fixed-income, currency, commodity platform,” he says. “They use common resources. It was a very fragmented firm in terms of asset management … and even though they have different locations, it’s really a consistent, common platform.”

JPMorgan’s Active ETF Medalist Ratings Shine

The increasing percentage of flows into JPMorgan’s active ETFs could indicate that investors are aligning with Morningstar’s ratings on JPMorgan’s higher-quality funds. As of the end of August, 45% of assets in JPMorgan funds were in funds with a Bronze or higher Medalist Rating. For JPMorgan’s active ETFs, that number was 84%, with Silver Medalist funds alone accounting for 46%.

One of the key reasons for these high ratings is the low fees charged by active ETFs.

“I think, mostly, it has to do with fees, because you might have four stock classes in an (open-end) fund. Each of the stock classes will have different medal ratings because of the fees, and ETFs generally have lower fees, so they will have higher medal ratings,” Olmsted says.

This situation causes investors to mostly turn to cheaper funds, namely ETFs.

International Force and Personnel

Morningstar analysts say JPMorgan has a disproportionate amount of strength in active ETFs, but is also stronger in international markets. The company ranks eighth in U.S. fund assets, but seventh in global fund assets and sixth in European fund assets.

“I think one thing that’s important to highlight at JPMorgan is their global reach. Unlike a lot of the above-average, high-earning asset managers, they’re truly globally diversified,” says Alyssa Stankiewicz, associate director of principals research at Morningstar.

“One reason JPMorgan ranks higher in Europe than in the U.S. in terms of asset rankings is that companies like State Street, Invesco and T. Rowe Price, which are very well-known and established in the U.S., haven’t had as strong a foothold in Europe,” he says. “I think JPMorgan has an early-mover advantage in Europe compared to T. Rowe Price. JPMorgan has had funds there for more than 40 years, about 15-20 years longer than TRP,” he added.

He says JPMorgan is keen to embrace new initiatives because it was an early adopter of active ETFs and entered the European funds market before most of its rivals.

“JPMorgan, compared to other asset managers, is not shy. I would say they have a sense of adventure,” Stankiewicz says.

Morningstar analysts also say the company has been successful in both recruiting and retaining quality talent.

“They don’t have a lot of turnover. Larger firms often struggle with turnover. That doesn’t seem to be the case here,” Olmstead says.

Meanwhile, this year, Clare Hart, who manages JPMorgan’s $46.3 billion equity income fund JMSFX, to win Morningstar’s 2024 U.S. Morningstar Outstanding Portfolio Manager Award. He retired on September 5 but spent 20 years as a portfolio manager.

The fund, which has a Silver Medalist Rating from Morningstar, looks for large-cap value stocks with at least a 2% dividend, demonstrating JPM’s strength in income-related funds. The fund has been in the top quintile of the large-value category in terms of returns over the past 15 years.

“JPM has an excellent staff from top to bottom, and they are always extremely professional, knowledgeable and well-prepared for every interaction. They are the A-Team in that respect,” says Todd Trubey, senior manager research analyst at Morningstar and Morningstar analyst on the JPMorgan Equity Income Fund.

“They have a very experienced team of analysts to assist their investment teams, and they tend to have large, dedicated teams,” Trubey says. “The portfolio managers tend to walk a line between investing with confidence and managing risk. Their strategies make sense, and they execute them very well.”