Consistently beating the market is a goal pursued by many, but achieved by only a few. Yet one exchange-traded fund (ETF) has done just that, outperforming the S&P 500 for five years in a row. The J.P. Morgan U.S. Research Enhanced Index Equity ETF has outperformed its benchmark every year since 2019 and is set to outperform in 2024 as well. The exchange and the SIX Swiss Exchange trade under JREU. The fund, which currently has $9.41 billion in assets under management, uses a strategy called the Research Enhanced Index (REI). This approach combines index investing and active management. Piera Elisa Grassi, co-fund manager of the ETF, said that although the fund has only existed since 2018, the concept of REI is not new to JPMorgan Asset Management. The fund manager has previously successfully used the strategy to manage assets for institutional clients such as pension funds. In fact, its history can be traced back to the mid-1980s in the United States. However, it wasn’t until 2018 that JPMorgan decided to combine this time-tested strategy with the increasingly popular ETF structure. U.S.-based joint fund managers Raffaele Zingone and Grassi also manage the J.P. Morgan Global Research Enhanced Index Equity ETF, which uses a similar strategy and outperformed the MSCI World benchmark. What exactly is REI? Grassi said research-enhanced index investing is very similar to passive index investing, but with the added benefit of J.P. Morgan Asset Management’s bottom-up fundamental research and risk management. The fund manager said the “secret sauce” is the fund’s ability to make lots of small bets, rather than a few large bets. The result is a fund that closely tracks its benchmark in terms of overall composition but with slight adjustments designed to generate excess returns. A quick look at the top 10 stocks held in the ETF reveals the same list of stocks as those in any S&P 500-tracking ETF, such as those from iShares, Vanguard, or State Street’s SPY. However, the weight assigned to each stock varies. For example, compared to the stock weighting in the iShares Core S&P 500 ETF, JPMorgan’s ETF adds 45 basis points to Microsoft stock. Likewise, Grassi’s fund is 21 basis points underweight Berkshire Hathaway compared with iShares funds. While the difference may seem insignificant for larger holdings, actively managed ETFs also ignore many stocks. JPMorgan’s own stocks were excluded from the fund, as were GE Aerospace, Applied Materials and Amgen. Overall, it holds about half the number of shares in the benchmark. What’s in the “secret ingredient”? Grassi and her fellow JPMorgan Asset Management fund managers have access to about 80 analysts around the world who cover as many as 30 stocks in “extreme detail.” Grassi said this broad coverage forms the backbone of REI’s strategy. “The vast majority of the secret sauce is in the DNA of the basic research team, which has been around for over 30 years now,” Grassi told CNBC Pro. “It’s something we’ve been doing for a long time and we always strive to do first-class research. “This has been an active strategy, but it’s very risky,” said Grassi, who has more than 20 years of industry experience. Grassi said that because her team follows a disciplined and “process-driven approach,” the fund can also withstand a hit when some stock call options go awry. “We don’t expect analysts to be right all the time,” she admits. “But since our active position is small, we can afford it.” In 2024, it returned 16.66%, compared with the S&P 500’s return of 16.48%. As always, past performance is no guarantee of future results, but track record does deserve attention.
