JPMorgan ETF Outperforms S&P 500 for Five Consecutive Years
In a market where beating the S&P 500 index is a significant achievement, one exchange-traded fund (ETF) has consistently outdone the benchmark for five straight years. The JPMorgan US Research Enhanced Index Equity ETF (JREU), employing a strategy known as Research Enhanced Indexing (REI), has proven its ability to deliver superior returns while maintaining a low fee structure.
Key Takeaways
- JREU outperformed the S&P 500 for five consecutive years, including 2024.
- The ETF uses a Research Enhanced Indexing (REI) strategy that combines index investing with active management.
- JREU is overweight in Microsoft and underweight in Berkshire Hathaway compared to the iShares Core S&P 500 ETF.
- The fund relies on extensive fundamental research conducted by a team of over 80 analysts.
- REI allows the fund to make numerous small bets, minimizing the impact of individual stock calls.
Decoding Research Enhanced Indexing (REI)
REI is a unique approach that blends the best of both worlds: passive index investing and active management. While emulating the composition of the S&P 500, it goes beyond simple tracking by incorporating JPMorgan Asset Management’s in-depth fundamental research and risk management techniques. This approach allows the ETF to make subtle adjustments in its holdings, aiming to generate excess returns.
The "Secret Sauce" of JREU
The REI strategy rests on the foundation of a vast network of 80 analysts globally who meticulously research up to 30 stocks in "great detail". Piera Elisa Grassi, co-fund manager of the ETF, emphasizes the role of this extensive research network:
"The vast majority of the secret sauce sits within the DNA of the fundamental research team that now has been in existence for more than 30 years. This is something that we’ve been doing for a long time, and we always try to have best-in-class research, and that becomes the raw material for me and the team to build the portfolio."
A Balanced Approach to Active Management
Unlike traditional actively managed funds that rely on bold, large bets, REI operates on the principle of numerous small adjustments. This approach enables JREU to withstand potential losses from individual stock calls while capitalizing on opportunities for incremental gains.
"It’s always been an active strategy, but very much risk-constrained," noted Grassi. "We don’t expect the analysts to get it right all the time, but because our active position is so small, we can take it on the chin."
A Consistent Track Record
While past performance is not a guarantee of future results, JREU’s consistent outperformance for five years, including a return of 16.66% in 2024, demonstrates the potential of the REI strategy. The ETF’s ability to deliver higher returns while maintaining a low 0.20% fee underscores its effectiveness in a competitive market.
Implications for Investors
JREU’s success raises several implications for investors:
- The power of research: The ETF demonstrates the value of rigorous fundamental analysis in generating superior returns.
- Balancing active and passive: REI offers a compelling alternative to traditional active management, minimizing risk while maximizing potential.
- Cost-effective outperformance: JREU’s low fee structure makes it an attractive option for investors seeking to maximize returns.
As JREU continues its trajectory of outperformance, it presents a compelling case for investors seeking to capitalize on the blend of passive indexing and active research that defines the REI strategy. While the market remains volatile, the ETF’s proven track record suggests a potential path toward achieving consistent returns over the long term.
