JEPI - Better High Yield ETF Buy: JEPI Vs. PEY

Summary

• Income ETFs are in high demand right now thanks to rising interest rates.
• Both PEY and JEPI seek to appeal to income investors by offering high yields.
• We compare these opportunities side by side and share our view on which is the better buy at the moment.

Income ETFs are in high demand right now thanks to rising interest rates. This is because for many investors - especially retirees - to justify holding equities at a time when CDs are yielding as much as 5%, they need to offer comparable dividend yields alongside growth potential.

Both the Invesco High Yield Equity Dividend Achievers ETF ( PEY ) and the JPMorgan Equity Premium Income ETF ( JEPI ) seek to appeal to income investors by offering high yields. As a result, it is not surprising to see that they have experienced significant assets under management growth over the past year:

In this article, we compare these opportunities side by side and share our view on which is the better buy at the moment.

JEPI Analysis

JEPI is an attractive investment option for investors due to its monthly dividend yield of 11.9% over the trailing twelve months. This dividend payout of nearly 1% of the investment every month is highly appealing, especially considering JEPI's well-diversified portfolio that is professionally managed and easy to invest and sell.

JEPI has a total of 132 holdings , making it highly diversified. Its top 10 holdings represent only 14.52% of its total holdings, which is significantly less than PEY's top 10 holdings. Additionally, only 1.07% of JEPI's portfolio is in cash and cash equivalents.

The portfolio is primarily composed of a diversified mix of industrial, financial, health care, and consumer defensive stocks.

Moreover, JEPI sells out of the money call options on the S&P 500 ( SPY ) to generate a higher dividend yield for its shareholders. While this strategy may forfeit some of the ETF's upside potential for increased cash flow generation each month, it results in more stable and predictable short-term total returns by smoothing out the broader stock market's spikes and plunges. However, this strategy likely has little impact on the fund's long-term risk-adjusted total return potential.

PEY Analysis

PEY generates its attractive 4.21% trailing twelve-month dividend yield by virtue of its focus on owning high yielding large cap companies that boast 10 plus year dividend growth streaks. As such, it seeks to track the Nasdaq U.S. Dividend Achievers 50 Index which is simply the 50 highest yielding $1 billion plus market cap stocks that have grown their dividends for at least a decade.

It currently has 52 holdings , making it sufficiently though not exceptionally well diversified. Its top 10 holdings represent 29.84% of its total holdings, which makes them fairly high conviction picks. Additionally, 0% of JEPI's portfolio is in cash and cash equivalents, so it is a pure equity fund.

The portfolio is primarily composed of a diversified mix of industries, with the vast majority being found in either the utilities, financials, consumer defensive, or health care sectors. Unsurprisingly, only 1.95% of its positions are found in technology given that sector's focus on growth investing rather than dividends.

Something else that is interesting to note is that its expense ratio is 0.52%, which is materially higher than JEPI's 0.35% expense ratio despite JEPI being much more actively managed with its options trades.

Investor Takeaway: Which Is The Better Buy?

While not being taken into account over a long period of time, it is worth noting that PEY has nearly doubled the total return performance of JEPI over the period where both have traded publicly:

This is surprising given that JEPI has a lower expense ratio and is structured to deliver more stable performance over time due to its greater diversification and options selling strategy.

The reason for this is simply because during the market weakness, there has been a flight to quality dividend paying stocks in general. As a result, PEY's greater concentration in these names - especially ones that have proven track records of paying out attractive and consistently growing dividends - is shining in more of a risk-off environment. Additionally, as the chart above shows, the past year has been filled with pretty sharp rises and dips in the market, which tends to work against JEPI's strategy as they often lose out on some of the upside during strong market rallies.

That said, moving forward, this approach may not always deliver alpha relative to the SPY or even JEPI. In general, we would expect PEY to outperform JEPI during periods of high volatility, while JEPI will likely outperform PEY during periods of flatter market behavior as their covered calls will often expire worthless in such a scenario. As a result, shareholders will be able to pocket the options premiums without having to forfeit much (if any) upside. An additional tailwind for JEPI over the long-term is its lower expense ratio. While it may not seem like a large difference in the short-term, the laws of compounding indicate that this small difference could lead to meaningful outperformance for JEPI relative to PEY over the long-term, all else being equal.

The main advantage of JEPI, apart from its lower expense ratio, is its ability to deliver consistent cash flows to shareholders over time. This makes it an attractive option for retirees who are living on investment income, as they can rely on JEPI's cash flow and reinvest the surplus accordingly.

Additionally, JEPI's approach mitigates some of the market risk, as retirees can withdraw their income during prolonged bear markets from options premiums instead of eroding their holdings. While the upside potential is limited during bull markets, retirees generally value downside protection more than upside potential as they prioritize covering living expenses through market cycles and amid macroeconomic uncertainty.

While PEY may be preferable for those bullish on the stock market's outlook and wanting to combine income with uncapped upside potential, JEPI is a better option for retirees in an uncertain macro environment.

High Yield Investor takes a similar approach by complementing high-quality total return compounders with higher-yielding instruments, resulting in a portfolio that has outperformed the market since inception with a ~7% dividend yield.

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