JPMORGAN ETF´S ARE A HIT, BUT WITH ITS OWN CLIENTS / THE WALL STREET JOURNAL

JPMorgan ETFs Are a Hit, But With Its Own Clients

Bank affiliates own 53% of the firm’s funds while raising conflict-of-interest questions

By Asjylyn Loder


JPMorgan isn’t the only ETF issuer that steers clients into in-house funds. Photo: Michael Nagle/Bloomberg News



JPMorgan Chase JPM 0.04%▲ & Co. launched an exchange-traded fund last June that invests in Japanese stocks. The fund raised $1.7 billion in six weeks, making it one of the fastest ETFs ever to surpass $1 billion in assets.

The biggest buyers: JPMorgan’s clients.

By buying JPMorgan’s ETFs on behalf of customers, JPMorgan’s private bank and wealth management divisions helped the JPMorgan BetaBuilders Japan ETF BBJP -0.14%▲ reach $3.3 billion in assets by the end of the year.

It wasn’t an isolated case. JPMorgan’s ETFs raised $15.6 billion last year, most of it from JPMorgan affiliates, according to regulatory filings and FactSet data compiled by The Wall Street Journal. The tide of client money helped boost the New York bank from an ETF also-ran to the 10th largest ETF issuer. By the end of 2018, JPMorgan affiliates owned 53% of the firm’s ETF assets, and the bank was the top shareholder of 23 of its 31 ETFs.

JPMorgan isn’t the only ETF issuer that steers clients into in-house funds. Almost every issuer has repackaged some of their ETFs into other investment products, and Charles Schwab Corp. and Northern Trust Corp.affiliates also buy substantial slices of their own ETFs on behalf of clients. The practice has even earned its own nickname: BYOA, for “Bring Your Own Assets.”

But a Wall Street Journal analysis of recent filings shows that no other top 10 ETF issuer is bringing its own assets on the scale of JPMorgan.

It doesn’t run afoul of regulations, provided conflicts are disclosed, and it isn’t necessarily a bad thing for investors because affiliated funds and services often charge lower fees. In fact, JPMorgan’s Japan ETF is significantly cheaper than a competing fund from BlackRock Inc.’siShares lineup.

“There is robust disclosure provided to wealth management clients relating to conflicts arising from the investment of client assets in JPMorgan managed strategies,” said JPMorgan spokeswoman Kristen Chambers. She said that switching customers to JPMorgan ETFs saved clients 10% to 60% in fees compared with competing ETFs.

But the practice is riddled with competing financial incentives that investors may not fully grasp. Firms often make more money by steering investors to in-house products, and portfolio managers may be reluctant to liquidate a home-office fund if it’ll hurt the company’s bottom line.

The result is that the ETF industry, lauded for its transparency, is becoming more complicated and at times opaque. Funds aren’t just marketed individually, but packaged and repackaged into a series of investment products sold by affiliates and third parties, giving rise to a web of financial incentives that some investors contend can promote an ETF issuer’s interests at the expense of customers.

“An independent ETF strategist doesn’t have those conflicts,” said Rusty Vanneman, president and chief investment officer of CLS Investments, an Omaha, Neb., firm that manages $9 billion in asset-allocation strategies that use ETFs. “They have open architecture and more choices.”

There is now $3.7 trillion in U.S. ETFs, up from $1 trillion at the end of 2009. Breaking into the business hasn’t been easy for latecomers like JPMorgan, which launched its first ETF in 2014. The industry is dominated by ultra-low-cost fund giants like Vanguard Group and BlackRock. New funds are at a disadvantage because they lack the size, tradability and track record required by the gatekeepers at most major firms, who decide whether a fund can be sold to its customers or packaged in asset-allocation models.

Richard Bernstein Advisors, which manages $9 billion in ETF strategies, typically holds off on investing in an ETF until it has been on the market for a year and raised $100 million, said Henry Timmons, the firm’s director of ETFs.

That is where BYOA comes in. One way to get a nascent ETF business off the ground is to leverage existing clients from other parts of the firm, such as broker dealers and advisory businesses that come with their own sales force and built-in customer base.


Schwab’s advisory and brokerage arms attract inflows by waiving transaction fees on Schwab ETFs, packing its ETFs into its own mutual funds and using them to build prefab investment portfolios that its advisers sell to clients. That advantage, combined with some of the lowest fees in the industry, helped Schwab vault to the fifth-largest U.S. ETF issuer just 10 years after launching its first fund.

Erin Montgomery, a spokeswoman for Schwab, said most of the firm’s ETF assets come from independent investors and advisers. “They’ve earned their way into portfolios across the industry on their own merits,” she said.

Another example is Northern Trust, a Chicago-based asset manager and custodian. The firm is the 12th-largest U.S. ETF issuer, according to Morningstar. At the end of 2018, Northern Trust clients were the top owner of 23 of its 26 FlexShares ETFs and accounted for almost 67% of the $15 billion invested in the funds, according to a Wall Street Journal analysis drawn from filings with the U.S. Securities and Exchange Commission.

Katie Nixon, chief investment officer of Northern Trust, says its FlexShares ETFs were designed in accordance with the firm’s “goals-driven investing” philosophy. She says all ETFs used by its portfolio managers, even those from FlexShares, regularly undergo a rigorous due diligence assessment.

“They’re clearly doing it to get their own products off the ground,” said Nicole Boyson, a finance professor at Northeastern University who studies conflict-of-interest disclosures. “These are brand new products, and the way they’re raising money is by putting client money into them.”


—Coulter Jones contributed to this article.