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Inside the New Global X JPMorgan Efficiente Index ETF

Zacks Equity Research

Diversified ETFs are capitalizing on the recent flare-up in volatility levels. This thin slice of the broad ETF world often beats the benchmark index. Though at present there are plenty of positive drivers in the global backdrop including the stepped-up stimulus in Japan, prospective launch of QE program in the Euro zone and steady growth in the U.S. economy, reasons to worry about cannot be ignored.

Sluggish revenue growth in U.S. corporate earnings, rising rate concerns, geo-political worries, continued soft display of Chinese economic data and deceleration in emerging markets left investors anxious about their stock as well as bond portfolios. On the other hand, most commodities are out of favor due to a soaring greenback and the demand-supply imbalance.

As a result, the growing uncertainty and policy differentiation in the global market sharpened the appeal for multi-asset or diversified portfolios which are low-volatility in nature and bring about stability in the portfolio (read: Buy These Low Volatility ETFs for Choppy Markets).

Keeping this in mind, J.P. Morgan launched a diversified ETF – JPMorgan Efficiente Index ETF (EFFE) – recently. Let’s delve a little deeper into the ETF and find out its prospects in the market:

EFFE in Focus

This ETF intends to deliver the return of the JPMorgan ETF Efficient 10TR Series X index. The fund’s strategy is to generate returns by investing in diverse asset classes with low correlation to the broader markets. EFFE has 5 holdings in its basket right now. The fund has amassed about $2.5 million in assets since inception.

The benchmark index mainly takes into account 11 ETFs and two ETPs which are based on both equities and bonds from developed and emerging markets. This exposure isn’t exactly cheap though, as the fund looks to charge investors 86 basis points a year in fees.

As of November 7, 2014, the fund allocated assets to iShares 20+Yrs Treasury ETF, Vanguard FDS S&P 500 ETF, iShares S&P Small Cap ETF, Vanguard REIT ETF and Vanguard Emerging Market ETF each accounting for about 20% of the portfolio (read: 3 Multi-Asset ETFs for Juicy Yields and Stability).

Who Does This ETF Suit?

This multi-asset ETF could be an interesting choice for those seeking a nice combination of yield and lower volatility that still has some equity-like appreciation potential. The U.S. equity markets are currently moving between the bulls and the bears.

While the domestic economy has been on a steady growth path from Q2 (as the economy grew about 4.6% in Q2 and 3.5% in Q3) offering a bullish sentiment for the stock market, the end of QE stimulus and prospective rise in interest rates call for volatility in the market.

In such a situation, the fund is expected to outperform the equity markets and also provide decent returns when compared to pure fixed income securities. Covering both asset classes under a single product, the fund will be able to offset volatility in equity markets as well as interest rate risks associated with the bond markets (read: Protect Your Portfolio with These Multi-Asset Income ETFs).

ETF Competition

Unfortunately for EFFE, it may have some heavy competition in the diversified ETF world. Currently the space is ruled by Multi-Asset Diversified Income Index Fund (MDIV). It is the most popular ETF in this category with AUM of about $840 million.

In terms of holdings, the fund holds 123 securities with iShares iBoxx $ High Yield Corporate Bond ETF (HYG) dominating the fund, accounting for nearly 15% of the portfolio. Apart from this, the fund is pretty well diversified with no security accounting for more than 1.6% of assets. Moreover, the fund charges 60 bps in fees which is less than the new EFFE.

Most of the other popular ETFs in the space namely iShares Moderate Allocation ETF (AOM), Morningstar Multi-Asset Income Index Fund (IYLD) and iShares Conservative Allocation ETF (AOK) charge less than the newcomer. Thus, to be a meaningful player over the longer term, the fund needs to endorse its investment objective and show outperformance compared to its competitors.

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Read the analyst report on EFFE

Read the analyst report on MDIV

Read the analyst report on AOM

Read the analyst report on IYLD

Read the analyst report on AOK


Zacks Investment Research



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