JPMorgan Chief ETF Strategist Jon Maier spoke with VettaFi at the Exchange conference last month in Las Vegas. He offered his thoughts on the rise of actively managed ETFs and what investors should be concerned with.
The JPMorgan Equity Premium Income Fund (JEPI) is the largest actively managed ETF in the world and has pulled in a few billion dollars year-to-date. What’s driving its success?
Derivative income is an area that's popular because investors enjoy the income. And there str other key benefits — whether it be JEPI or the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) or competitor products — as the overall volatility is lower. You’re selling your upside to receive something and that's income, but with the ability for [some] upside as well. You have a portfolio that's generally 2% out of the money, that’s managed by professional managers, using bottom-up research and picking stocks, with an index overlay on the options.
Through lots of different market cycles, I think it's a good enhancement for income, and income since the financial crisis had been nonexistent. Obviously, that's not the case anymore. These derivative income funds pay higher yields. I think that's a good enhancement to an overall portfolio with lower volatility. JEPI gets around 60% of the volatility of the S&P 500. And JEPQ has volatility a little bit higher than that versus the Nasdaq-100 index.
What are the risks investors should be looking at right now?
There's a new administration, there's uncertainty, there are tariffs, and changes to spending and taxes, etc. The stock market is agnostic. It takes its cues from what’s going on around it.
I think the key here is diversification. It all comes down to that. You have the ability to diversify now because bond yields are higher. Could bond yields go higher? Sure. So you stay shorter. Could there be more volatility in a concentrated market that's kind of widening out? Sure.
But there's growth, there's value, there's international. There's large-cap, there's small-cap, depending on market conditions. Staying diversified and focusing on some of the less-loved asset classes — like international, which has actually done very well this year — is the approach that anybody should take when they're managing a portfolio. It's just becoming a little more apparent because we're also used to 10 stocks driving the market.
Fixed Income Can Add Diversification
How should investors be positioning themselves right now?
I think fixed income is an area to really focus on — obviously not your entire portfolio, but it provides you the ability to diversify and manage portfolio risk. If you think rates are going to go up from here because of increased deficits or tax cuts or spending becoming a greater percentage of GDP, stay shorter. There are instruments for that.
But I believe the intermediate part of the curve is probably the best part of the curve right now, because there are some risks that longer-term yields could go higher.
The short end of the curve provides you less risk. But if you want a little bit of higher yield, move out a little bit on the curve.
There are a lot of segments in the fixed income space that aren’t covered very well by the current ETF offerings in the U.S. Is that where are you think maybe there's the most opportunity for the ETF industry to expand?
Fixed income ETFs represent 17% of ETF assets. ETF assets are a little less than $11 trillion. Flows this year overall, in all ETFs are $300 billion.
Fixed income represents one-third of the flows this year. Active fixed income represents half of that one-third, so $50 billion.
You're getting outsized flows, and we’re seeing flows into short and intermediate instruments. At the very beginning of the year, people did extend out on duration. That's one area of portfolio diversification. The second, I think, is international. And the third is active management for growth equities, which makes sense because of the concentration in some of the top names.
Active Management in ETFs Growing Quickly
What do you think lies ahead for the ETF space?
Obviously, I'm a champion for actively managed ETFs, and I've been involved in ETFs for the better part of 20-plus years. It all started off passive, and every index has been replicated, cut apart, split apart, recreated, but still index-based. I just think it's so fascinating that, over the past several years, just the issuance has [mostly] been active.
Just because you come out with an active ETF doesn't mean it's going to be successful. You have to have good performance, and you have to have the right distribution. I think that's important in terms of which ETF an investor chooses to use. But if 90% of overall ETF assets are passive — and so far this year 36% of the flows have been active — something's happening. They're moving into growth, value, international core bonds on the active side. It's a revolution that's happening.
