JEPI - FTHI Vs. JEPI: Who Has Got You Covered?

2023-12-20 11:00:00 ET

Summary

• First Trust BuyWrite Income ETF seeks to provide current income to its investors.
• The income objective is met with a two pronged approach.
• The fund yields over 8% and has had decent NAV preservation since inception in 2014.
• We review the fund and provide our verdict.

First Trust BuyWrite Income ETF ( FTHI ) primarily focuses on the ongoing income needs of its investors. The income objective is attained by investing in U.S. listed equity securities. This equity basket includes foreign stocks that trade directly or in the form of depository receipts [ADR] on American exchanges. The literature this ETF notes that the advisor selects securities based on a:

mathematical optimization process which uses market capitalization, liquidity, operating cash flow, dividend yield, share repurchases, and debt issuance factor constraints to produce a diversified portfolio favoring higher dividend-paying stocks that will seek to have an approximate tracking error of 300 - 500 basis points (3-5%) relative to the S&P 500 Index.

Source: FTHI Fact Sheet

At December 15, FTHI held around 186 securities, with a little over 30% concentrated in the top 10, most of whom are not known for their high dividends.

Technology giants Apple Inc. ( AAPL ) and Microsoft Corporation ( MSFT ) headline the above list, with the consumer discretionary sweetheart Amazon.com, Inc. ( AMZN ) occupying the third spot. The balance of the top 10 list is also made up primarily of globally known, market moving behemoths like NVDIA Corporation, and not one, but two classes of Alphabet Inc. ( GOOG ). The value oriented Berkshire Hathaway Inc ( BRK.B ) brings up the rear, and while not reflected above, is closely chased by Tesla, Inc ( TSLA ) which comprised 1.50% of the portfolio on that date. While the difference is not earth shattering, FTHI is overweight Energy, Consumer sectors, Communications and Real Estate compared to the S&P 500 Index.

It is also underweight Technology, Financials, Health Care and Industrials sectors relative to the index. The S&P 500 sector allocation presented below is as at November 30, but the numbers do not typically move more than a smidge from month to month.

FTHI yields over 8.5% based on its last monthly distribution and current price of $21.40.

Most of the holdings in the top 10 list of this fund yield sub 1%. Even if the balance equity portfolio were to yield higher, it alone is not sufficient to meet its high income objective of this ETF. The missing piece of the puzzle is options income. FTHI writes calls on the S&P 500 index in a bid to supplement its income earning power with the option premiums. Calls were sold on over 70% of the value of the fund at the end of November. The fund tends to sell calls out of the money but of course a rally or decline in the index would change the relative positioning. As of November 30, 2023 the calls were slightly in the money.

According to the fund website, the option premiums can form up to 20% of its net asset value. However, in practice, this is almost an impossibility because the fund primarily sells short term, out of the money calls. We can see that in the average time to expiration (22 days) and the 1.93% of the average call moneyness above. At December 15, the option premiums made up only around 2% of the total assets.

To reach 20% would require leap selling and going deep in the money.

The options portfolio is actively managed in response to the prevailing market conditions and opportunities. The equity portfolio, on the other hand, is rebalanced periodically at the discretion of the advisors.

Performance

Buy-Write funds will lag the market in bull runs. That is almost never in doubt. Sure you will have the occasional buy-write fund that will actually not write any covered calls, like this one . That one could keep up. But the rest of them will lag. FTHI is no different and here are the results since inception versus the SPY. Whether you compare price or total return, the lags are huge.

The only real thing you need to see whether there is some oomph in bear markets. Looking at the most recent bear market in 2022, we can see that yes, FTHI did ease some concerns and provided significantly less volatility during a difficult year.

We have also thrown JPMorgan Equity Premium Income ETF ( JEPI ) in the mix above and you can see how the two tracked each other. JEPI is relatively new (launched in early 2020) compared to our protagonist (2014). To see FTHI's performance over longer timeframes, we compared it to Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX ). This is a closed end fund, but works as a comparative for our purposes. You can see the trail here and it does not look very pretty.

Verdict

FTHI has done ok on a nominal basis as investors have NAV preservation alongside decent income. Of course, on a relative basis, it has had difficulty versus several similar funds. JEPI's equivalent mutual fund ( JEPIX ) has been around for a bit longer than JEPI and when you run it against FTHI, there is that same huge gap.

So overall while it would be hard for anyone long to complain, they have to know that they could have done better, a lot better. We would have possibly looked to give this past performance a pass if it was strictly a value strategy underperforming growth. But as we see today, the fund is holding very risky growth sectors and is not deviating too far from the S&P. While it may have in the past favored more defensive sectors, it certainly is not doing so today. We have to stick with JEPI for our pick amongst option funds and will give FTHI a pass.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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