JPMorgan’s Bryon Lake on ETF Growth, Active Management, & More

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On the most recent episode of ETF Prime, VettaFi’s Stacey Morris, head of energy research, offered analysis on the happenings in the energy sector in 2023 and related ETFs to keep an eye on. JPMorgan’s Bryon Lake, global head of ETF solutions, chatted about the firm’s active management approach and rapid growth within the ETF industry, and Aniket Ullal, CFRA’s head of ETF data and analytics, discussed the popular ETF stories happening now.

What’s Going on With Energy Performance This Year?

After a strong year of outperformance last year, energy seems to have sizzled in the first quarter of 2023. “If you look at broad energy, the energy benchmark that we look at for the U.S. was off about 1% on a price-return basis through Friday, March 3rd versus the S&P 500 being up over 5%,” Morris explained.

This slower start to the year can be attributed to challenges that oil and gas companies are facing in an environment with weaker commodity prices, particularly for natural gas, as well as cost inflation — the cost of drilling wells has increased by about 20% over the last year which puts increased pressure on producers. Those factors coupled with lower earnings expectations and reduced free cash flow yield expectations this year have created an environment that’s resulted in energy weakness to kick off the year.

The Energy ETFs That Could be Primed to Perform in 2023

There are pockets of opportunity however within certain energy subsectors, Morris explained: “For example, higher costs for oil field services hurts producers but it’s a benefit for those oil field service companies.”

Oil field services companies are forecast for earnings growth in 2023 as oil field activity increases this year and higher demand leads to greater pricing power. The VanEck Oil Services ETF (OIH) offers exposure to these companies expected to do well in the changing energy environment, and is up 9% YTD.

Energy infrastructure or midstream is also another area of opportunity in 2023 within energy because companies are largely based on earning fees for services such as storage, transporting pipelines, and more. “These companies are also positioned to see EBITDA growth this year, albeit mostly modest because these are stable, fee-based businesses, but still positive growth,” said Morris.

MLPs are generally an income play within portfolios and have had a strong start to the year, likely due to favorable dividend announcements. For instance, the underlying index for the Alerian MLP ETF (AMLP), the Alerian MLP Infrastructure Index is offering a yield of 7.5% and is up more than 6% in total returns YTD as of 03/03/2023. MLPs can be more than just income opportunity for investors and have a place as a defensive energy exposure that isn’t as directly correlated to commodity prices.

Morris went on to discuss tactical versus strategic use of energy in portfolios, their role as income providers long-term, and some of the tax-deferred benefits that exposures like MLPs can offer.

“I think overall 2023 is going to be very different from 2022” Morris explained, detailing the low likelihood of strong performers within energy last year repeating that performance in 2023. “With that in mind, I think there’s a lot of merit to looking more closely at subsectors like oilfield services and midstream or MLPs where there is this expectation for a positive rate of change for financial metrics and it’s not really tied as much to what happens with commodity prices.”

JPMorgan’s Monster Growth Within ETFs

JPMorgan has established itself as a noteworthy issuer within the ETF industry and is currently the 7th largest ETF issuer with popular funds like the JPMorgan Ultra-Short Income ETF (JPST) — that’s currently yielding more than 5% — and the JPMorgan Equity Premium Income ETF (JEPI) continuing to bring in strong inflows in 2023. Bryon Lake, global head of ETF solutions at JPMorgan, was on to discuss the growth of the ETF suite even during the challenging market environment of 2022.

“We’re swimming in the currents of the broader adoption of ETFs,” Laid said. “We’re seeing more and more investors embrace the ETF technology within their portfolios.”

The rise of active ETFs has also played into JPMorgan’s success; active ETFs currently account for about 4% of total AUM but made up almost 20% of flows in 2022.

“I think a couple things have lined up where investors are embracing active ETFs and we’ve been delivering some of our best-in-class active capabilities through the ETF wrapper and you’ve started to see that client adoption that we’ve always hoped to have,” explained Lake.

Advisors and investors need look no further than the performance of the JPMorgan Active Value ETF (JAVA) that utilizes a bottom-up stock selection and analysis strategy, to see the merits of active management in troubled times: JAVA outperformed the Russell 1000 Value Index by 6% last year.

Discussion went on to cover the rise of converting existing strategies into ETFs, JPMorgan’s beta builder suite of passive ETFs, and the benefits of accessing fixed income through ETFs.

The Popular ETF Narratives Happening Now

Aniket Ullal, CFRA’s head of ETF data and analytics, has a long history in the ETF industry, having worked for S&P as the product lead for U.S. equity indices before leaving to start his own venture as a data and analytics firm that was later acquired by CFRA. Geraci notes that the popularity of active ETFs in 2023 is one of the most noteworthy stories happening right now.

“Clearly active ETFs are punching above their weight this year in terms of assets,” Ullal said. “In terms of flows we’ve seen just a little under $20 billion in flows this year. That’s a pretty significant number, which means it’s about 40-45% of the inflows that have come in this year.”

Perhaps of even greater interest is that none of the top 5 issuers within active ETFs — Dimensional, JPMorgan, First Trust, Avantis, and Pimco — are top issuers within indexed ETFs, which Ullal believes is a newer dynamic within the ETF industry.

Options-based strategies have also grown popular and was arguably the most important trend of 2022 according to Ullal. The appeal has been two-fold: covered call strategies that generate income became extremely popular in the market challenges of last year, and for use in defined outcome buffer strategies that offer protection on the downside while capping upside performance capture.

“My hypothesis is this is a longer-term trend,” Ullal explained. “I think there’s a trend here where ETFs are going to move more towards solution-oriented products.”

Geraci also touched on the rotation happening to international in the first months of the year which Ullal believes is driven largely by the changing narrative of the strength of the dollar and the belief that it would be easing going into the year, a path that looks to have deviated in recent weeks given sticky inflation and potentially more aggressive Fed rate hikes.