JPMorgan BetaBuilders US Mid Cap Eq ETF BBMC

The portfolio maintains a sizable cost advantage over competitors, priced within the cheapest fee quintile among peers.

The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and an underweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy’s management team earns an Average People Pillar rating. The strategy's parent organization earns the firm an Above Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

JPMorgan BetaBuilders US Mid Cap Eq ETF earns a High Process Pillar rating.

The leading factor in the rating is its parent firm's impressive long-term risk-adjusted performance, as shown by the firm's average 10-year Morningstar Rating of 3.3 stars. This fund tracks an index, which also increases its process rating. Historical data, like Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The parent firm's five-year risk-adjusted success ratio of 53% strengthens the process. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. Their noteworthy success ratio suggests that this firm does well for investors and that this fund may benefit from that.

The investment strategy as stated in the fund's prospectus is:

The investment seeks investment results that closely correspond, before fees and expenses, and to the performance of the Morningstar® US Mid Cap Target Market Exposure Extended IndexSM. The fund will invest at least 80% of its assets in securities included in the underlying index. The underlying index consists of equity securities primarily traded in the United States and targets those securities that fall between the 85th and 95th percentiles in market capitalization of the free float adjusted investable universe.

The portfolio is overweight in consumer cyclical by 2.9 percentage points in terms of assets compared with the category average, and its real estate allocation is similar to the category. The sectors with low exposure compared to category peers are technology and financial services; however, the allocations are similar to the category. The portfolio is positioned across 600 holdings and is diversified among those holdings. In its most recent portfolio, 4.7% of the portfolio's assets were concentrated in the top 10 fund holdings, as opposed to the category average's 16.0%. And finally, in terms of portfolio turnover, this portfolio turns over its holdings less quickly than peers, potentially leading to lower costs for investors and eliminating a drag on performance.

There are three managers listed on the fund: Alex Hamilton, Nicholas D’Eramo, Michael Loeffler. Experience on the team is abundant, with 14 years of average portfolio management experience. Together, they manage a total of eight strategies, with a Silver asset-weighted average Morningstar Medalist Rating, demonstrating their potential to deliver positive alpha relative to the category median in aggregate. The team has lacked continuity recently, with Oliver Furby leaving in the last two months, detracting from its rating. Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process.

Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

Narrowing in on the past two-year period, it trailed the category index, the Russell Midcap Index, by an annualized 1.4 percentage points, and underperformed its average peer by 1.4 percentage points. And more importantly, when extended to a longer time frame, the strategy fell behind the index. On a four-year basis, it trailed the index by an annualized 95 basis points.

Even when adjusting for risk, the fund is not favorable. The share class trailed the index with a lower Sharpe ratio, a measure of risk-adjusted returns, over the trailing three-year period. This subpar risk-adjusted performance has not resulted in higher volatility, as measured by their standard deviation, which is close to the benchmark. Finally, the share class proved itself ineffective as it was unable to generate alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

This fund sits in the cheapest quintile of its Morningstar Category. Its low fee, considered jointly with the fund’s People, Process, and Parent Pillars, suggests that this share class has high potential to deliver positive alpha relative to the lesser of its median category peer or the category benchmark, leading to its Morningstar Medalist Rating of Silver.