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J.P. Morgan’s New EM ETF Challenges Conventional Rivals


There is no dearth of emerging markets exchange traded funds featuring large, if not excessive exposure to state-controlled enterprises, many of which hail from the energy and financial services sector.

While Chinese banks and Latin American energy giants usually rank among the largest companies in their respective countries, investors are looking for more from emerging markets ETFs. A growing number of fund providers are taking approach, helping investors dodge the risks associated with state-run firms will still offering ample exposure to a possible rebound in developing world equities. [A New Spin on EM ETFs]

Add J.P. Morgan Asset Management to that list. The ETF issuing arm of the venerable Wall Street bank introduced the JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM) Thursday, marking the third ETF the company has brought to market since June 2014.

“JPEM addresses drawbacks inherent in market cap-weighted indices, specifically excessive risk concentrations and a large number of securities with unattractive characteristics,” according to a statement issued by J.P. Morgan Funds.

The new ETF tracks the FTSE Emerging Diversified Factor Index, a strategic beta index that seeks to mitigate regional and sector risk by using “a multi-factor stock filter to rank and select stocks based on value, quality and momentum.”

“The index is designed to reflect the performance of emerging market securities representing a diversified set of factor characteristics. Constituents are selected based on a composite factor score. The composite factor spans Value, Price Momentum Earnings Revisions and Quality characteristics,” according to FTSE.

As is the case with some competing emerging markets indices, JPEM’s underlying index is heavily allocated to China and Taiwan to the tune of a combined 38.4%. However, South Korea is not featured in the new fund or the index because FTSE classifies that country as a developed market. Brazil and South Africa are the other countries with double-digit allocations in the FTSE Emerging Diversified Index.

“We believe that J.P. Morgan has emerging markets capabilities and investment insights that will be attractive to investors, and this product is an important additional step in delivering those capabilities, with an eye toward better risk-adjusted returns,” said Robert Deutsch, global head of ETFs for J.P. Morgan Asset Management, in the statement.  “This ETF is also a good option to provide diversification for client portfolios that are overweight developed markets.”

As is the case with many emerging markets ETFs, JPEM features a large weight (27.4%) to the financial services sector. However, the ETF’s combined allocation to the energy, telecom and utilities sectors – often home to large concentrations of state-run companies – is just 26%. [Dodging SOEs With ETFs]

In the emerging world, ex-state-owned firms typically sport higher valuations and lower dividend yields than their state-controlled peers, but stocks such as Petrobras (PBR) and Colombia’s Ecopetrol (EC) down an average of 70% over the past two years, there is something to be said for trimming state-run exposure even if mines incurring valuation premiums to do so.

JPEM charges 0.45% per year.

J.P. Morgan’s other ETFs have seen solid starts. The JPMorgan Diversified Return Global Equity ETF (JPGE) , which debuted in June 2014, has over $42 million in assets under management. The JPMorgan Diversified Return International Equity ETF (JPIN) is just over two months old and has $14.3 million in AUM.