Inside JPMorgan's U.S. Small Cap ETF

The U.S. stock market staged a rally led by small-cap stocks after Donald Trump won the presidential election. The Russell 2000 index tracking small-cap stocks recorded its longest rally in two decades. Among the many things, the President-elect has promised to introduce a burst of stimulus by increasing infrastructure spending package, easing regulations and tax cuts with an aim of accelerating economic growth and creating more jobs in the country (read: ETFs & Stocks That Topped or Flopped After Trump Won).

Meanwhile, the possibility of a rate hike increased following the release of the minutes from the U.S. Federal Reserve’s November meeting. In fact, data from CME Group (NASDAQ:CME) show a 93.5% chance of a rate increase in the December policy meeting. The chances of the first interest rate increase in the year are high, considering that inflation has accelerated in the recent months and job market data is encouraging. The U.S. economy has been on a solid footing with an improving housing market, rising consumer prices and a robust labor market (read: U.S. Job Growth Momentum Continues: ETFs to Buy).

In this scenario, while large caps have grabbed investors’ attention, small caps emerged as winners. Since small caps generate most of their revenues from the domestic market, they are more closely tied to the domestic economy. These have lower foreign exposure and thus are less impacted by rising dollar, global growth slowdown and other political or economic issues driving volatility across the globe.

Thus, it is not surprising that one of the renowned ETF issuers, JPMorgan (NYSE:JPM), introduced a product in the U.S. targeting the small-cap space. The new product – JPMorgan Diversified Return U.S. Small Cap Equity ETF JPSE – hit the market on Nov 15. Below, we highlight the product in detail:

JPSE in Focus

The fund seeks to track the performance of the Russell 2000 Diversified Factor Index and aims to overcome the concentration risk and bias toward overvalued securities in the market-cap-weighted indexes. The stocks are selected in the portfolio on the basis of several criteria including value, quality and momentum.

JPSE is a well-diversified fund holding about 834 stocks. None of the stocks hold more that 0.9% of the total weight. Sector-wise, Consumer Staples gets the highest exposure with 22.4% of the portfolio. Consumer Discretionary, Industrials, Information Technology and Utilities also get double-digit exposure in the basket. The fund has an expense ratio of 0.39%. As per ETF.com, the fund already has $25.2 million worth assets under management.

How Does it Fit in a Portfolio?

Small-caps are generally categorized into the high risk high return zone. The fund is a good choice for investors seeking high return potential but with lesser volatility that comes with the small-cap stocks. Thus, the fund aims to deliver higher risk-adjusted return than a traditional market cap-weighted ETF, owing to its unique selection criteria.

With the tone of the Fed being more hawkish than expected, chances of a rate hike in the December meeting have gone up. This could be due to a series of recently released upbeat U.S. economic data. Meanwhile, global growth worries are still at large. So, small-cap stocks with higher exposure to the U.S. markets than their large-cap counterparts look attractive at this point. Thus, the launch of the new ETF targeting the U.S. small-cap market seems well timed.

ETF Competition

The newly launched ETF will have to face competition from small cap -focused ETFs like iShares Russell 2000 ETF IWM. IWM is one of the most popular ETFs in the space with an asset base of $36.4 billion and average trading volume of 28.5 million shares. The fund tracks the Russell 2000 Index and charges 20 basis points as fees, which is much lower than the aforementioned product (read: November ETF Asset Flow Report).

iShares Core S&P Small-Cap ETF IJR is another popular fund in the space with an asset base of $24.7 billion. It trades in a good volume of more than 1.1 million shares a day. The fund tracks the S S&P SmallCap 600 Index. The fund charges 7 basis points as fees (see Small Cap ETFs here).

Apart from these, JPSE could also face competition from Vanguard Small-Cap ETF (TO:VB) tracking the CRSP US Small Cap Index. The fund has an asset base of $15.3 billion and volume of almost 650,000 shares a day. It has an expense ratio of 8 bps.

Thus, the newly launched fund is costlier than the popular ETFs in the space. So the path ahead can be challenging for JPSE.

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ISHARS-R 2000 (IWM): ETF Research Reports

ISHARS-SP SC600 (IJR): ETF Research Reports

VIPERS-SM CAP (VB): ETF Research Reports

JPM-DVSFD RT SC (JPSE): ETF Research Reports

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