Consistently outperforming the market is a feat many strive for but only a few achieve. However, one exchange-traded fund (ETF) has done just that, beating the S & P 500 index for five consecutive years. The JPMorgan US Research Enhanced Index Equity ETF has beaten the benchmark every year since 2019 and is also outperforming in 2024. The ETF, which charges 0.20% in fees, trades as JREU on the London Stock Exchange, Borsa Italiana , Deutsche Borse and Six Swiss Exchange . The fund, which currently manages $9.41 billion in assets, employs a strategy known as Research Enhanced Indexing (REI). This approach combines index investing and active management. Piera Elisa Grassi, co-fund manager of the ETF, said while the fund has only existed since 2018, the concept of REI is not new to JPMorgan Asset Management. The fund manager had previously used the strategy successfully to manage assets for institutional clients such as pension funds. In fact, it dates back to the mid-1980s in the United States. However, it wasn’t until 2018 that JPMorgan decided to marry this time-tested strategy with the increasingly popular ETF structure. Raffaele Zingone, co-fund manager based in the U.S., and Grassi also manage the JPMorgan Global Research Enhanced Index Equity ETF , which uses a similar strategy to outperform the MSCI World benchmark. What exactly is REI? Research Enhanced Indexing is very similar to passive index investing but with the added benefit of JPMorgan Asset Management’s bottom-up fundamental research and risk management added to it, according to Grassi. The “secret sauce” lies in the fund’s ability to make numerous small bets rather than a few large ones, according to the fund manager. The result is a fund that closely mirrors its benchmark in terms of overall composition but with slight tweaks aimed at generating excess returns. A quick look at the top 10 stocks held in the ETF will reveal an identical list of stocks to those in any S & P 500 tracking ETF, such as those from iShares , Vanguard or State Street’s SPY . However, the weighting assigned to each of those stocks varies. For instance, JPMorgan’s ETF is overweight Microsoft shares by 45 basis points compared to the weighting for the stock in the iShares Core S & P 500 ETF. Similarly, Grassi’s fund is underweight Berkshire Hathaway by 21 basis points compared to the iShares fund. While the difference appears trivial for the larger holdings, the actively managed ETF also omits many stocks. JPMorgan’s own shares are excluded from the fund, as are GE Aerospace , Applied Material , and Amgen . In total, it holds about half the number of stocks included in the benchmark. What’s in the ‘secret sauce’? Grassi and her fellow JPMorgan Asset Management fund managers have access to around 80 analysts globally that research up to 30 stocks in “great detail”. This extensive coverage forms the backbone of the REI strategy, according to Grassi. “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,” Grassi told CNBC Pro. “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.” JREU-GB SPY 5Y line “It’s always been an active strategy, but very much risk-constrained,” noted Grassi, who has over 20 years of industry experience. Grassi said the fund can also withstand hits when some stock calls go wrong, due to the disciplined and “process-driven approach” her team follows. “We don’t expect the analysts to get it right all the time,” she admitted. “But because our active position is so small, we can take it on the chin.” In 2024, it returned 16.66% compared to the S & P 500’s 16.48%. As always, past performance does not guarantee future results, but the track record certainly warrants attention.
