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smart alpha

Active exchange traded funds (ETFs) reflect a true evolution in the investment landscape. They combine the diversification and transparency elements of passive investment with active, research-driven security selection. By doing this, active ETFs seek to offer outperformance against a typical ETF.   

At Nutmeg, we’re passionate about the role that ETFs can play in delivering great investment outcomes for our customers. We’ve long been an advocate of ETFs and how they align with our core investment principles. In fact, we believe that ETFs are superior to conventional mutual funds in almost every way.  

In our opinion, ETFs represent an improved contrast to traditional mutual funds: embodying the same principle of pooling assets but with greater efficiency, transparency, choice and flexibility. With a universe of funds spanning over 1800 strategies across global equity, fixed income and commodities markets, ETFs offer our investment team the broadest range of asset classes available at the lowest possible cost. 

Of course, one of the major differences between ETFs and mutual funds is how they select their securities. Behind almost every ETF is a market index: a transparent, rules-based, methodology that governs what the fund owns. This could select companies based on their size – for example the largest 100 companies in the UK stock market via the FTSE 100 – but these rules-based approaches can also focus on other attributes to select and rank securities, for example: dividend yield.  

You might ask, hasn’t Nutmeg always been sceptical of security-selection approaches that could equate to stock-picking? 

True, we have long argued that the majority of traditional stock-picking funds offered ordinary investors poor value for money. Stock–picker fund holdings can be opaque, lack appropriate diversification and have unnecessarily high management fees, all deeply unattractive attributes that have contributed to their failure to deliver for investors.  

In the aftermath of the collapse of the Equity Income Fund, managed by one of the UK’s most popular stock–pickers, Neil Woodford, we felt clearly justified in our stance that there had to be a better way. We stated a belief that customers should be offered transparency, and that funds should manage their diversification and liquidity appropriately, no matter whether they are active or passive in approach. Put simply, we believe traditional approaches to stock selection typically embody characteristics and risk that is too often not appropriately rewarded. 

Active ETFs are different. While they do offer stock selection, unlike funds run by stock-pickers they guarantee transparency, efficiency, choice and flexibility. We believe active ETFs now offer a unique way for investors to seek outperformance within an asset class by giving them the best of both worlds: combining the diversification, low cost and transparency benefits of a passive approach with active, research-driven security selection.  

This is a welcome development in the way stock selection is executed and delivered to investors. We think active ETFs can offer investors a smart, research-led approach to security selection, seeking out-performance without the usual trade-offs in cost, diversification or transparency. Like passive rules-based ETFs, they represent a superior alternative to mutual funds.  

So how do these active ETFs work and how do these active ETFs work and how have they performed historically?  

We have recently launched a new range of portfolios: Smart Alpha portfolios powered by J.P. Morgan Asset Management. With Smart Alpha portfolios, we’re combining Nutmeg’s core investment principles and expertise around ETFs and fractional investment with the research resources and experience of one of the world’s leading investments houses.  

Nutmeg’s Smart Alpha portfolios use unique active ETFs developed by J.P. Morgan Asset Management and the full complement of their global research teams. This research enhanced approach is core to the DNA of the Smart Alpha portfolios because it combines the best qualities of both active and passive investment strategies. These ETFs incorporate a best-in-class research driven investment philosophy that has been refined by over 30 years of experience, to offer stock selection based on J.P Morgan Asset Management’s analytical insight, conviction and relative valuation views, combined with strong risk management.   

This means research enhanced ETFs look to exploit stock specific insights to take overweight positions (positions larger than the benchmark position) in securities expected to do well by J.P. Morgan Asset Management’s team of over 80 analysts, and underweight positions (positions smaller than the benchmark position) in securities expected to do poorly. Yet they do so while maintaining strict risk and diversification characteristics, ensuring you are able to benefit from security selection without the typical additional risks.   

As with all stock selection strategies, the proof is in the pudding when it comes to performance. The research enhanced approach employed by J.P. Morgan Asset Management has a track record in US equity markets that has been consistently proven over the last 30 years.    

Over this period, this risk-controlled approach to stock selection has delivered on its promises of beating the market – providing alpha – for investors: with outperformance equating to 0.24% per annum since 1989 net of the current ETF charges [1]. Meanwhile, the track record in global equity markets stretches back to 2003 and has delivered outperformance that equates to 0.53% per annum net of the current ETF charges [2].

The next evolution in stock selection & asset allocation 

While Smart Alpha portfolios embody the belief that asset allocation is the single most important decision facing every investor, the use of innovative active ETFs seeks to enhance the potential return streams available within these portfolios without introducing additional risk.  

This is the next advancement in stock selection: combining active, research driven security selection and the potential to generate outperformance with the core features that make ETFs so attractive – low costs, diversification and complete transparency 

We believe active ETFs and their use in our Smart Alpha portfolios represent an evolution in the debate between active and passive investing. Powered by J.P. Morgan Asset Management, we have created a ground-breaking approach that blends the best of both worlds. 



[1] JPMAM US REI Strategy annualised performance gross of fees, less the current fee for the JPM US REI ESG UCITS ETF, as at 30/09/2020.

[2] JPMAM Global REI Strategy annualised performance gross of fees, less the current fee for the JPM Global REI ESG UCITS ETF, as at 30/09/2020.

Risk warning

As with all investing, your capital is at risk.  The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past and future performance indicators are not reliable indicators of future performance.