Updated: Jun 19
The Potential of JEPI - JPMorgan Equity Premium Income ETF
If you are looking for an investment option that can provide you with high yield and low risk, you might be interested in JEPI (JPMorgan Equity Premium Income ETF). This ETF is designed to generate income and reduce volatility by using a covered call strategy on a basket of low-volatility stocks from the S&P 500.
In this article, we will examine the performance, strategy, risks, and benefits of JEPI, as well as some alternatives and comparisons. By the end of this article, you will have a better understanding of whether JEPI is a good investment choice for your portfolio.
How JEPI Has Performed Since Its Inception
JEPI was launched in May 2020 and has quickly attracted a lot of investor interest. As of April 2023, it has over $3.5 billion in assets under management and an expense ratio of 0.35%. Since its inception, JEPI has delivered impressive results compared to its benchmark index, the S&P 500.
Using TradingView to compare total returns allows us to easily see that JEPI has less volatility than the S&P 500 and similar returns since its inception. If you sign up using my link, you will get a free trial and a discount on your subscription.
It has also generated consistent income through dividends and option premiums, resulting in a monthly dividend yield of around 11.9% over the trailing twelve months. This means that if you invested $10,000 in JEPI at its inception, you would have received about $1,190 in dividends over the past year.
How JEPI Selects Stocks and Sells Options
JEPI’s strategy is based on two main components: stock selection and option writing. For stock selection, JEPI chooses low-volatility stocks from the S&P 500 based on ESG criteria and valuation metrics. Environmental, social, and governance (ESG) are the criteria that measure how a company operates in a responsible and sustainable manner.
Valuation metrics include factors such as dividend yield, earnings growth, and price-to-earnings ratio. JEPI’s portfolio consists of 95 holdings as of April 2023, with the top sectors being information technology, health care, consumer discretionary, and financials.
For option writing, JEPI sells call options on its portfolio stocks through equity-linked notes (ELNs). ELNs are debt instruments that are linked to the performance of an underlying asset, such as a stock or an index.
By selling call options on its ELNs, JEPI collects option premiums from the buyers, who have the right to buy the underlying asset at a predetermined price (the strike price) before a certain date (the expiration date). If the underlying asset’s price stays below the strike price, JEPI keeps the option premium and the ELN. If the underlying asset’s price rises above the strike price, JEPI delivers the ELN to the option buyer and receives the strike price in return.
How JEPI Aims to Offer Market Participation With Lower Volatility and Higher Yield
JEPI’s strategy is designed to offer market participation with lower volatility and higher yield. By selecting low-volatility stocks, JEPI reduces its exposure to large price fluctuations and market downturns. By selling call options, JEPI generates additional income and creates a buffer against potential losses.
JEPI’s covered call strategy’s goal is to reduce volatility and increase yield compared to the S&P 500.
What Are the Potential Risks and Challenges of Investing in JEPI
While JEPI may offer attractive income and lower risk, it is not without its challenges and drawbacks. Some of the potential risks and challenges of investing in JEPI include:
Market conditions: JEPI’s performance may depend on the market conditions and the behavior of the underlying stocks. If the market is too bullish, JEPI may miss out on some of the upside potential due to its option writing. If the market is too bearish, JEPI may suffer from capital losses due to its stock exposure.
Interest rates: JEPI’s income generation may be affected by changes in interest rates. If interest rates rise, the value of JEPI’s ELNs may decline, reducing its income potential. If interest rates fall, the demand for JEPI’s ELNs may increase, raising its income potential.
Option pricing: JEPI’s income generation may also be affected by changes in option pricing. Option pricing depends on various factors, such as volatility, time to expiration, and dividend payments. If option prices decline, JEPI may receive lower option premiums, reducing its income potential. If option prices increase, JEPI may face higher opportunity costs, limiting its upside potential.
Tax implications: JEPI’s dividends may be taxed differently depending on the source of income. JEPI’s dividends are taxed as ordinary income, which means as much as 50% of the yield could go to the IRS if owned in a taxable account where the investor is in the highest tax bracket. Some of JEPI’s dividends are taxed as qualified dividends, which are subject to lower tax rates.
Fees and expenses: JEPI has a relatively high expense ratio of 0.35%, which may erode its returns over time. JEPI also incurs transaction costs and management fees associated with its option writing and ELN activities, which are not reflected in its expense ratio.
Growth potential: While JEPI may offer attractive income, its focus on generating yield might result in lower share growth over the long term compared to other investment options. JEPI may also have lower dividend growth potential due to its option writing, which limits its capital appreciation.
How Does JEPI Compare to Other High-Yield ETFs and Investment Options
JEPI is not the only high-yield ETF that uses a covered call strategy. There are other ETFs that employ similar or different strategies to generate income and reduce volatility, such as JEPQ, QYLD, SCHD, etc. Each of these ETFs has its own pros and cons for different investor goals and preferences. For example:
JEPQ is another covered call ETF from JPMorgan that tracks the Russell 1000 Index and sells call options on it. It has a lower fee of 0.29% and a higher dividend yield of 13.4%. However, it is less diversified with 50 holdings and less popular with $300 million in assets. Consider my article about JEPI vs. JEPQ for more information.
QYLD is a covered call ETF that tracks the Nasdaq 100 Index and sells call options on it. It has a lower fee of 0.60% and a higher dividend yield of 13.2%. However, it is more volatile and more exposed to the technology sector. Consider the article QYLD vs. JEPI for more information.
SCHD is a dividend ETF that tracks the Dow Jones U.S. Dividend 100 Index and selects high-quality dividend stocks based on various criteria. It has a lower fee of 0.06% and a lower dividend yield of 3.4%. However, it is more diversified with 102 holdings and more popular with $24 billion in assets. Check out the article JEPI vs. SCHD for more information.
There are also other investment options for income-focused investors, such as dividend stocks, REITs, bonds, etc. Each of these options has its own advantages and disadvantages, such as growth potential, tax efficiency, diversification, etc. For example:
Dividend stocks are individual stocks that pay regular dividends to shareholders. They can offer high yield, dividend growth, and capital appreciation. However, they are also subject to market risk, company risk, and dividend cuts.
REITs are companies that own and operate real estate properties and pay most of their income as dividends to shareholders. They can offer high yield, diversification, and inflation protection. However, they are also subject to interest rate risk, sector risk, and tax implications.
Bonds are debt securities that pay fixed interest payments to investors. They can offer low risk, stable income, and capital preservation. However, they are also subject to interest rate risk, credit risk, and inflation risk.
Is JEPI a Good Investment?
JEPI may be a good investment choice for income seekers and conservative investors who are looking for monthly dividends and lower risk exposure. JEPI will perform well in bear markets but may lack in bull markets due to its capped upside potential. Investors must also note that the dividends are not qualified, meaning you pay higher taxes than dividend ETFs like SCHD.
However, JEPI also has some potential risks and challenges, such as market conditions, interest rates, option pricing, tax implications, fees and expenses, and growth potential. JEPI is not the only high-yield ETF that uses a covered call strategy. There are other ETFs that employ similar or different strategies to generate income and reduce volatility, such as JEPQ, QYLD, SCHD, etc.
There are also other investment options for income-focused investors, such as dividend stocks, REITs, bonds, etc.
If you are interested in learning more about JEPI and how it compares to other investment options, you might want to check out these articles:
Which ETF is more suitable for income seekers: QYLD or JEPI?