BBMC - BBMC: A JPMorgan BetaBuilders ETF To Consider Exchanging

2023-09-18 09:00:00 ET

Summary

• The JPMorgan BetaBuilders U.S. Mid Cap Equity ETF tracks the Morningstar US Mid Cap Target Market Exposure Extended Index. It is one of 18 in the BetaBuilders series.
• Here I review this ETF in detail and compare its performance against several other similar ETFs. The idea of using a factor-based MC ETF is also covered.
• I give the BBMC ETF an Exchange/Sell rating as its performance trails other Mid-Cap Index-based ETFs. Own Mid-Cap stocks, just not this configuration.

Introduction

JPMorgan has 18 ETFs in their BetaBuilders series, adding three new bond versions this past spring. I plan on looking across the BetaBuilders suite and reviewing some of the uncovered ones. That, plus the fact I just reviewed several Mid-Cap non-indexed competitors, I picked the JPMorgan BetaBuilders U.S. Mid Cap Equity ETF ( BBMC ) to review first.

I give this ETF an Exchange/Sell rating as a Core ETF as its performance trails other Mid-Cap Index-based ETFs. Investors have better choices even though most others have higher fees. While I view factor ETFs to be held for reasons different from ETFs like BBMC, I briefly note those “competitors” at the very end of this article.

What is BetaBuilders?

JPMorgan describe the basic strategy behind this set of ETFs in the following terms.

Our leading market cap-weighted ETFs, BetaBuilders, are portfolio building blocks that track indexes from well-respected firms like Morningstar, MSCI and Bloomberg Barclays. Backed by J.P. Morgan’s 30+ years of indexing experience, they leverage the technologies and trading power of one of the world’s largest asset managers to deliver broad market exposures at lower costs.

Source: am.jpmorgan.com betabuilders

The first ETF in the series was the JPMorgan BetaBuilders USD High Yield Corporate Bond ETF ( BBHY ), launched back in 2016.

JPMorgan BetaBuilders U.S. Mid Cap Equity ETF review

Seeking Alpha describes this ETF as:

The JPMorgan BetaBuilders U.S. Mid Cap Equity ETF is an exchange traded fund launched and managed by J.P. Morgan Investment Management Inc. It invests in growth and value stocks of mid-cap companies. The fund seeks to track the performance of the Morningstar US Mid Cap Target Market Exposure Extended Index , by using full replication technique. J.P. Morgan Exchange-Traded Fund Trust - JPMorgan BetaBuilders U.S. Mid Cap Equity ETF was formed on April 14, 2020.

BBMC has $1.6b in AUM and sports a low 7bps fee. Income investors need to look elsewhere as the yield is only 1.5%. There are equity funds designed for them too.

Index review

The index tracks the performance of publicly listed mid-cap securities in the US equity market, which fall between 85th and 95th percent in market capitalization by free float of the investable universe. This Index does not incorporate Environmental, Social, or Governance ('ESG') criteria. This is reflected in Morningstar giving it a Very Low rating on that scale. The Index rebalances each quarter and updates the holdings semi-annually.

I must say I found nothing that indicates the Morningstar index selection criteria is anything other than market-cap, meaning fees compared to other index-based ETF within the Mid-Cap segment could decide which ETF is better, though that doesn't seem to be true here.

Holdings review

The analysis starts by looking at the sector allocations.

The largest five sector allocations account for over 75% of the portfolio. Unlike a Large-Cap ETF, Technology is not the top sector, placing only fourth. For investors with a high Large-Cap exposure, adding an ETF like BBMC helps smooth out the sector allocations in their portfolio. The manager also provided Industry data; here are the ten largest allocations.

Those industries cover just over 50% of the portfolio.

Top holdings

With almost 600 holdings, the Top 20 are only 9% of the portfolio, one of the lowest concentrations I have come across. The plus/minus in that is the ETF's return is not tied to a few stocks performing good or bad. Another positive as I measure ETFs is the fact that the lower half of the portfolio still accounts for 30% of the weight, one of the highest I have seen for that part of the portfolio. My translation: all positions have some potential to affect performance.

Distribution review

Having a consistent dividend payment is not occurring, maybe because the ETF has a 30% annualized turnover ratio, which could affect the dividend income available to distribute. Again, with the small yield provided, I do not see this being a concern.

Why the Exchange/Sell rating

I chose that section title to reflect my belief investors should have exposure to Mid-Cap stocks as they have outperformed both Large- and Small-Cap stocks since 1972. That is also true when measured against the differences in risk levels each market-cap had. Since Exchange is not a standard Seeking Alpha action classification, selling BBMC and buying a different Mid-Cap ETF is my suggested action, not selling out of Mid-Cap stocks altogether. Let's now look at wat's behind that rating.

As my regular readers know, I consider an index-based ETF like BBMC as a "Core" holding; an ETF that will generate market returns and can basically be put on autopilot so one can concentrate their analysis to other funds that might add Alpha to their portfolio. Based on its 40-month results, there are at least three other well-known Indexed, non-factor MC ETFs that over that time period had better results, with the SPDR S&P MidCap 400 ETF ( MDY ) being the top performer. This is even though MDY comes with 16bps more in fees, meaning understanding the underlying index is more important than knowing the cost of the ETF to investors.

While the data presented next is static, it could provide clues as to why BBMC is lagging MDY in what investors have experienced. I start with the Vanguard Style boxes so data is from a common source.

Using recent data, we see BBMC holds a larger allocation to both Small-Cap stocks and Growth stocks compared to MDY, which uses the S&P MidCap 400 Index as its target. Using another source, while the higher Small-Cap exposure should have helped BBMC, the higher allocation to SCG stocks would have hurt, assuming today's percents reflect history.

Sector wise, only two currently show a wide allocation spread with MDY holding a larger percent in Consumer Discretionary stocks and BBMC in HealthCare stocks, though both differences in allocations are under 3%. With 85% of MDY’s stocks held by BBMC (56% in the other direction), all those extra stocks BBMC has to hold because of its index are highly likely the cause of its underperforming its indexed competitors.

Portfolio strategy

Diversification to reduce risk is something most, if not all, investors will hear from their investment advisor and most talking heads in the media. Using PortfolioVisualizer.com's Portfolio Optimizer tool, it gave a 53%/47% LC/MC as the best allocation based on mean variance/ maximize Sharpe ratio criteria.

As the above TR chart shows, just deciding to add a Mid-Cap indexed ETF requires another level of due diligence into the index used by the ETF as many times that results in a wide range of returns investors might experience. Unfortunately, for many broad indices, selection details are hard to pin down.

The other choice: Factor-based ETFs

For investors not concerned about holding a Core Mid-Cap ETF, the good news is there are dozens of single or multi factor ETFs to pick from. The bad news is that so many choices can result in no choice being made. Remember the goal isn’t perfection but gaining Alpha by selecting a proven factor-based fund. Here are the links to my recent look at several factor-based Mid-Cap ETFs that compete in that sector.

• XMMO: Momentum Strategy Working For Mid-Cap Stocks
• XMHQ Is Seeking Alpha's Top Ranked Mid-Cap Blend ETF!
• VFQY Gets Qualified Buy: Like The Results But Have Concerns

While Mid-Cap stocks have lagged Large-Cap stocks over the past decade, longer history has shown they are an asset class to include in an investor’s U.S. equity mix.

For further details see: