JEPI - Better High-Yield Passive Income Buy: SPYD Vs. JEPI

2023-05-11 20:47:26 ET

Summary

• Both SPYD and JEPI offer high passive income yields.
• SPYD holds a well-diversified and low-cost portfolio of high-yield blue chip stocks.
• JEPI offers a higher cost actively managed investment strategy that taps into the power of covered calls to generate superior yields for investors.
• We compare these opportunities side by side and share our view on which is the better buy at the moment.

Both the SPDR Portfolio S&P 500 High Dividend ETF ( SPYD ) and the JPMorgan Equity Premium Income ETF ( JEPI ) offer high passive income yields to investors. SPYD holds a well-diversified and low-cost portfolio of high-yield blue chip stocks, whereas JEPI offers a higher cost actively managed investment strategy that taps into the power of covered calls to generate superior yields for investors.

In this article, we will compare these opportunities side by side and share our view on which is the better high yield passive income buy.

SPYD ETF Analysis

SPYD currently offers a ~4.7% dividend yield, which is toward the high end of its historical range:

Moreover, it has proven to be a pretty reliable dividend payer, sustaining its general range of quarterly payouts over time. That said, investors should keep in mind that its quarterly payouts do vary significantly, so those depending on it for passive income to meet living expenses should plan accordingly:

With $6.48 billion in assets under management, it is not a huge ETF, but it still has sufficient size to be plenty liquid for investors looking to trade in and out.

Moreover, its expense ratio of just 0.07% is quite low, making it an inexpensive way to gain access to a broadly diversified portfolio of high yielding stocks.

SPYD's top holdings include some high quality defensive names such as Southern Co. ( SO ), Edison International ( EIX ), Iron Mountain ( IRM ), AvalonBay Communities ( AVB ), and Altria Group ( MO ):

Moreover, the fact that its top 10 holdings make up just 15.05% of its total portfolio and its top holding is just 1.58% of its total portfolio implies that it is remarkably well diversified despite only holding 82 total positions in its portfolio (a relatively small number for a large ETF like this).

We also can see from its sector allocation that it is very defensively positioned, with nearly 75% of its portfolio allocated to the more defensive real estate, financial, utilities, consumer defensive, communication, and health care sectors:

As a result, SPYD is well positioned to continue generating attractive dividends for shareholders through a recessionary environment.

JEPI ETF Analysis

JEPI has been successful in attracting investors due to its monthly dividend payouts, which offer a trailing twelve-month yield of 11.31%. The idea of receiving a monthly return on investment of almost 1% through dividends is certainly appealing, especially when the portfolio generating this income is professionally managed, well-diversified, and easy to buy and sell, as is the case with JEPI. As a result, its assets under management have surged since the inception of the fund back in early 2020 to about $25.5 billion today:

Moreover, JEPI's total holdings are more diversified than SPYD's, and its top 10 holdings constitute only 14.91% of its total portfolio, which is even lower than SPYD's top 10 holdings. Overall, we see that its top 10 holdings are well-diversified by asset class, with several consumer defensive businesses like Hershey ( HSY ), Coca-Cola ( KO ), and PepsiCo ( PEP ) alongside a biotech/pharmaceutical company like AbbVie ( ABBV ) and even some big tech companies like Microsoft ( MSFT ) and Amazon ( AMZN ).

This is also seen in its overall sector allocations, with a pretty even allocation across technology, healthcare, consumer defensive, industrials, and financials:

Effectively, JEPI strives to provide investors well-diversified exposure across stock market sectors while simultaneously providing a superior dividend yield by selling out-of-the-money call options on the S&P 500 ( SPY ). It thereby trades some of the ETF's upside potential in exchange for higher cash flow generation for shareholders and lower overall portfolio value volatility each month.

Investor Takeaway: Which Is The Better Buy?

While SPYD has been around for several years longer than JEPI has, SPYD has thus far meaningfully outperformed JEPI since JEPI's inception:

Moreover, SPYD outperformed SPY over that period whereas JEPI slightly underperformed it:

While a period of roughly three years is not a long time, when you combine SPYD's meaningful outperformance with its lower expense ratio (0.07% for SPYD to 0.35% for JEPI), it seems reasonable to assume that SPYD will likely deliver superior total returns over the long-term relative to JEPI.

That said, as the chart above also indicates, JEPI delivers more stable returns and if we were to get stuck in a long period of bearish and/or stagnant stock market performance, JEPI would likely deliver similar or even better total returns relative to SPYD.

It is also interesting to note that based on their portfolio construction, SPYD is more of a concentrated bet on the defensive sectors whereas JEPI tries to provide broadly diversified exposure across the spectrum of stock market sectors and then overlays covered calls to create significant monthly cash flow.

Over the long-term, we think that SPYD is a better pick for retirees for whom a 4-5% annualized yield is sufficient to meet living expenses since it has a lower expense ratio and is invested in more defensive sectors.

However, for retirees who want/need greater income than 4-5% and want it to come in a more consistent monthly stream, JEPI may be the better option. That said, investors should keep in mind that enhanced income from options does not represent a "free return" and that over the long-term - absent clear demonstration of skill from the team trading the options - the options premiums are really nothing more than taking from total returns generated by capital appreciation in the underlying fund. Given that JEPI is merely selling covered calls on SPY, it is highly unlikely that they will be able to deliver alpha through selling options by implementing value investing techniques on individual securities.

Still, many retirees prefer the simplicity and peace of mind that comes with getting a substantial cash distribution each month, even if it leads to weak principal appreciation over the long-term.

At High Yield Investor we are steering clear of JEPI and do not hold SPYD at the moment either, as we have been able to significantly outperform both funds by implementing value investing techniques and opportunistic capital recycling on a more concentrated portfolio .

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