JPST: return to hold value (BATS: JPST)

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Thesis

JPMorgan Ultra-Short Income ETF (BAT:JPST) is a short-duration bond ETF that invests its proceeds in high-quality bonds, asset-backed securities and Treasury guarantees with very short maturity dates. At the end of 2021, we wrote an article where we explained why simply holding onto cash is a better idea than using a short-term bond vehicle like JPST in light of the upcoming monetary tightening environment. Our thesis turned out to be correct, with a slightly negative JPST for 2022. In normalized interest rate environments, these vehicles are ideal for storing reserve money because they generally maintain a stable net asset value and price while providing increased returns to investors. In a tightening environment, when rates rise, bond prices fall, so even for very short-dated bonds, the price tends to fall rather than be stable.

With most risk-free rates behind us, we are finally finding value in the fund. JPST is a very robust and proven short-duration bond fund that has now returned to a healthy 30-day SEC yield and stable pro forma NAV for the remainder of the year. Unless inflation spirals out of control for the remainder of the year, we believe the Fed will raise rates to a neutral 2.5% for fed funds, after which it will wait for the broader assessment of the economic impact. The yield curve has already priced this move, so we believe JPST will post a stable NAV going forward and reward investors with a robust return. We are moving to To buy on JPST as a cash parking vehicle for retail investors.

Performance

Since our article where we advised to hold only cash, the fund is very slightly down:

Evaluation

Author’s Note (Search Alpha)

We weren’t expecting a significant negative performance here, just a small negative, which happened. Even the best short-duration vehicles have small negative performance under such severe crunch cycles.

The fund is only slightly down since the start of the year:

YTD

Cumulative performance since the beginning of the year (in search of alpha)

This outperformance relative to other asset classes is due to its very short duration profile, with the bond’s laddered maturities allowing the fund to ride on current market yields, resulting in little overall underperformance.

Assets

The fund only holds good quality securities:

credit

Credit quality (fund fact sheet)

We can see that around 22.2% of the portfolio is parked in AAA securities, with an even spread across the credit spectrum down to BBB securities.

High-quality corporate bonds are the main holding of the portfolio, representing more than 50% of the securities:

while carrying

Holdings (Fund Fact Sheet)

In addition to investment grade bonds, the fund holds a significant amount of commercial paper (CP) and asset-backed securities.

From a duration and weighted average life perspective, everything is very short-term, giving the fund an overall duration of less than 1 year:

rug

Maturity Profile (Fund Fact Sheet)

The fund currently has a duration of 0.39 years, making it a very short-term investment vehicle that will capture rising yields when the bonds are rolled over.

Dividend yield vs 30-day SEC yield

Dividend yield

Usually, financial websites show a 12-month dividend yield when reporting this metric. For example, if you look at JPST on Seeking Alpha, you will notice that the dividend box shows a ratio of 0.87% – when you look at the details of how this is calculated (go to the Dividends tab – Dividend History ), you’ll notice that this metric actually calculates by adding up the dividends paid over the last 12 months and then annualizing that figure relative to the current market price of the funds. In a stable interest rate environment, this measure is appropriate, but in a rising/falling interest rate environment, looking at this analysis would be very misleading (as rates rise, the dividend yield would underestimate this you get, for example).

30 Day SEC Yield

This is the best measure when analyzing a short duration bond fund given the current interest rate environment and the propensity for some funds to have a rolling effect in their bond holdings. , where the discount to par is absorbed by the attraction of maturity and higher yields. bonds are purchased. This creates an effect of having a much higher 30-day SEC yield compared to a 12-month dividend yield. The SEC’s 30-day yield is the best metric to consider when considering short-term bond funds, as it gives you an accurate picture of how much money you’re actually going to receive based on the current portfolio situation. and where the market price clears. . Taking the same example as above, we will notice that JPST has a 30-day SEC yield of 1.49% versus 0.87% declared dividend yield.

Conclusion

JPST is a short-duration bond fund that had a modest negative performance in 2022 due to higher rates. With most of the curve movement behind us, we believe the fund will have a stable net asset value going forward. Given rising yields and the fund’s strong 30-day SEC yield of 1.49% and rising, JPST is once again becoming an attractive parking vehicle. We are moving to To buy on JPST.

About Catherine Wilson

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