ETFs Started Passive, Growing Up Active: Jon Maier

Bloomberg

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00:00So let's start there. The fact that you are seeing this consistent bid into treasuries.

00:05I know that you recently released your fourth quarter guide to ETFs, fixed income, a hot topic

00:10in that guide. So how do you explain the recent and consistent bid into treasuries?

00:17Well, first of all, half of our flows this year happen into fixed income, actively managed fixed

00:22income ETFs. And what I have noticed as the Fed has reduced rates and there's expectations that

00:28they will lower rates more, potentially December, potentially January. Investors are looking to

00:35maintain their yields. So there was a lot of money in ultra short. Now, we're still seeing

00:40money going into ultra short as well, but we are seeing more of a diversification to kind of step

00:45out on the duration curve, whether that be intermediate, intermediate core plus. And I

00:51think it's all in the expectations that rates are going to go lower. And then investors who have this

00:57tremendous amount of cash want to deploy that cash or bring out some of that cash from ultra short

01:02into longer duration instruments. And I think that's what's going on right now.

01:06So when you see that interest in going to a longer duration, is that mirrored in, say,

01:10the muni market as well?

01:12The muni market is, you know, investors are very tax sensitive. And if you look at some,

01:17two of our funds, JMST and JMUB, have about $10 billion in assets. JMUB is the largest actively

01:27managed ETF in the muni space. And we are seeing that good amount of flows and a lot of interest

01:34because they're looking to create that sustainable after tax yield, which I think is important. So

01:40yeah, munis are certainly being a recipient of. I don't know if it's the crypto influence,

01:46but I want to talk about JPST and the inflation factor. So here's the problem people have with

01:52general bonds. Forget money markets. Let's just go with the ag or ag-like products. JPST is trying

01:58to beat these benchmarks with not just treasuries, but corporates too. It's returned 3% annualized.

02:05Pretty good. But my crypto brain, which I'm growing half of right now, would say, well,

02:10but inflation's 2%, probably 3% or 4% really. So this real return is nothing. And I think that's

02:16where some people get frustrated with the bonds and they want something else that gives them a

02:21positive real return.

02:23I mean, crypto is, I mean, I think it's a completely different category from JPST. JPST is something very

02:29conservative. It's an investment grade portfolio. So I'd be hard pressed to compare it to crypto.

02:35I'm just saying that it got me thinking about real returns much more. And so if the real return

02:42here, because the ag has returned nothing in real terms in 10 years, I think this is why bonds have

02:48underperformed a little bit in flows lately. I just want to say, like, if somebody were to say,

02:52well, 3%, what would you say about the real return? There's nothing you can do about it, I guess.

02:56Well, I mean, what I think about is diversification across your overall portfolio. And you're not going to

03:02just be in JPST. That's going to be your cash, cash-like. It's not cash. It's certainly not cash,

03:08but it's on a lower duration portfolio. And then when you move out to intermediate core,

03:15intermediate core of about 5%, you go a little further out, you get closer to 5.5%, 6%. You start

03:23laddering the fixed income portion of your portfolio. And that's only one portion of your overall

03:28portfolio. Standard 60-40 portfolio would be 40% or so. And that's diversification. And right now,

03:36when we are seeing valuations very high, particularly on the equity side, I think

03:41investors really need to focus on diversification. And that brings down your overall volatility in your

03:48portfolio.

03:48Let's talk a little bit more directly about the credit space when it comes to ETFs, because I'm taking a look

03:55at the guide, and you write that 90% of high-yield ETF assets are actually in passive vehicles right now.

04:03I know that, of course, JP Morgan has an active junk bond fund, but I wonder why that is. That's just because

04:09issuers haven't necessarily been launching in the active high-yield space? Or does that speak to maybe investors

04:15still having some hesitation around going into high-yield in an active product?

04:20Well, yeah, I think it's a bias. If you think about how the ETF world grew up, it grew up largely

04:26passive. So the active entrants have been later to the marketplace. So it's adjusting the investor to

04:34the new structure, full transparency, and making them aware that you can still operate just like you can

04:40operate in a mutual fund, but inside an ETF. You have that liquidity, you have that transparency.

04:46And you know what? ETFs actually price the underlying securities. They were very helpful

04:50during COVID, whether it be investment-grade corporates or high-yield. The underlying market

04:54was priced by the pricing of the ETF. And that, I think, has accelerated the usage and understanding

04:59of ETFs. Also, it has helped the efficiency of the overall marketplace, whether it be high-yield

05:05or investment-grade corporates. It's made the fixed-income market overall more efficient.

05:10So it's essentially getting the word out that you could operate inside the ETF structure more

05:17efficiently. The transparency, I think, is important. And its portfolio managers have kind of gotten over

05:24that leap. But I think it started off with the bias that it grew up passive. And now it's moving

05:30towards active. This year, 40 percent of overall fixed-income flows, active and passive, have been

05:36active. Similar number for equities as well. You write about how there's an equification of credit

05:43markets, which I love, because it's a way of thinking about credit that's familiar to stock

05:47investors. It's had a beneficial impact on liquidity. Do you see that more in the high-grade space or in the

05:52high-yield space? I see it in both, actually. I see that because you can get that pricing

05:58for an ETF at any given time. Now, you may not like that pricing, but you can get the pricing

06:05at any time. We have a great slide in the guide, TTFs, looking at the underlying high-yield market

06:09of volume of the underlying market, as well as looking at the 10 largest high-yield ETFs in the

06:15aggregate. And you'll see that the volume is meaningfully higher, like goes up, particularly

06:20during periods of volatility. But the underlying market kind of trades like that. And it trades like

06:26that because it's often not traded. It's housed within individual accounts and institutional

06:31accounts. So I think that's the big difference. It's giving a pricing when the underlying market

06:37may not have a bid. And just real quick, what's your take on the ETF share class coming? I know

06:42you guys have done conversions. You've launched clones. I think you are looking to do some of the

06:46share classes. What should we expect in the next couple of months? Yeah, well, I think it's still

06:51early. Obviously, final approval is not across the board. I think there's operational components

06:58that really need to be overcome, both on the issuer side as well as the custodian side. But it's

07:04something, it's a reality that's going to happen. And it'll be interesting to see the evolution. I

07:09think there potentially could be unintended consequences, both for the mutual fund shareholder

07:14as well as the ETF shareholder, both positive and negative. So we'll see that over time.

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