JPMorgan Diversified Return International Equity ETF JPIN has a combination of characteristics that suggest it should perform well against the MSCI ACWI ex USA Index. But it only holds a small subset of stocks from the foreign market and its performance may differ from expectations. In light of our growing concerns that the active risk the fund takes may not be adequately rewarded, we are downgrading its Process Pillar to Average from Above Average, which pushes its Morningstar Analyst Rating to Neutral from Bronze.
This strategy starts with the FTSE Developed ex North America Index and splits it into four regions and 10 sectors within each region, creating 40 regional sector buckets. Each of these buckets is weighted by the inverse of its historical volatility, pushing the fund toward stable segments of the market and away from those that are more volatile. Within each regional sector, the strategy ranks constituents by their value, momentum, and quality characteristics. It combines these scores into an overall composite score and sweeps the highest scoring names into the portfolio. Stocks within each regional sector are weighted equally, subject to constraints designed to promote diversification and liquidity.
While the portfolio tries to hold stocks with an attractive combination of value, momentum, and quality characteristics, it tends to emphasize names with smaller market capitalizations and lower valuations. Weighting regional sectors by the inverse of their volatility should influence the fund’s risk/return profile, causing it to outperform the MSCI ACWI ex USA Index when the market declines and underperform during market rallies.
For the most part, the fund has followed that pattern and dialed down risk. But it can stray in unexpected ways. For example, it didn't provide any downside protection during the coronavirus drawdown. Emphasizing stocks will smaller market capitalizations caused the fund to modestly underperform the benchmark from early February through late March 2020. Despite its value orientation, the fund trailed the index by 4.6 percentage points between October 2020 and May 2021, when cheap stocks rallied. Stock selection and its large stake in the utilities sector hurt performance.