JEPI - JEPI: 10.6% Yield Play With House Money

2023-07-09 11:30:00 ET

Summary

• JEPI offers an appealing 10.6% yield and is a good choice for investors who want high income and can accept variable monthly dividends.
• JEPI invests at least 80% of its assets in S&P 500 stocks, with up to 20% invested in equity-linked notes tied to selling call options against the S&P 500.
• Despite risks such as higher interest rates and a potential recession, JEPI serves as an attractive alternative to the market index with a higher yield.

The stock market has been called many things, with some referring to it as a giant casino. While I don't believe that to be the case over the long run, since the long-term performance of stocks tracks corporate earnings, anything can cause volatility in the short-term. That's why even blue chip stocks can see swings of 20%+ in either direction over the course of just 12 months.

Investors who want to profit from market volatility may want to consider options, and since it may be scary to go at it alone, they may want to consider the JPMorgan Equity Premium Income ETF ( JEPI ).

JEPI pays an appealing 10.6% yield, or what I would call "house money" considering that some of its income returns are generated from selling options that are related to market price movements. In this article, I discuss why JEPI may be a good choice for those investors who like high income and can accept variable monthly dividends.

Why JEPI?

JEPI is an ETF that's actively managed by JPMorgan ( JPM ). It seeks a dual-pronged approach to generating income, first by investing at least 80% of its assets in stocks in the S&P 500 ( SPY ), many of which pays dividends. Technology represents JEPI's largest segment, representing 17% of total (compared to 29% for the S&P 500). The following 4 largest segments, industrials, healthcare, consumer defensive, and each make up 12-14% of the portfolio.

JEPI's top 10 holdings are comprised of a group of well-respected leaders in their respective industries, such as Adobe ( ADBE ), a pioneer in shifting its business model from software license to SaaS (software-as-a-service), cloud and e-commerce giants Microsoft ( MSFT ) and Amazon ( AMZN ), payments giants Visa ( V ) and Mastercard ( MA ), and cable giant Comcast ( CMCSA ). This provides a combination of income and stability to the portfolio, while capturing upside potential due to the essential nature of their products and services.

Up to 20% of the remaining amount may be invested in ELNs (equity-linked notes) that are tied to selling call options against the S&P 500. This generates income for JEPI by entitling it to the option premium from the counterparty. However, it also takes away potential upside from the holdings should they hit the agreed upon strike price at time of contract. That's not a big issue, considering that JEPI is already able to capture upside from the remaining 80% of its portfolio that's invested in equities, and that intent of the 20% invested in ELNs is to generate income.

This strategy appears to have worked well for investors, as JEPI generated $5.77 per share worth of dividends (paid monthly) over the trailing 12 months, equating to a 10.6% yield on the current share price of $54.57. At the same time, JEPI has achieved its secondary objective of providing less volatility than the market index. As shown below, JEPI's beta score hovered between 0.58 and 0.68 over the past 12 months, meaning that it had less volatility than the market average.

JEPI also carries a B+ grade for Risk compared to other ETFs. As shown below, it has a lower volatility and top 10 holdings represent just 15% of the portfolio total, sitting far below the 36% median across all ETFs and below the 31% of the S&P 500. One can simply look at the price swings of mega-cap tech companies like Meta Platforms ( META ) over the past 12 months to understand that even these very large companies can have wild price swings and can thereby impact an overall index.

At the same time, JEPI scores an A+ grade for liquidity with an average daily volume of 4.6 million shares, meaning that typical retail investors shouldn't have issues with buying or cashing out their shares at prevailing market prices.

JEPI charges a reasonable expense ratio of 0.35%, which sits lower than the 0.45% median across the ETF universe, but higher than that of passive-managed ETFs. While some investors may balk at the idea of paying higher fees for active management while staying in favor of lower fee passive funds, it's worth considering that active managers tend to perform better during times of market volatility, as we find ourselves in now. In JEPI's case, market volatility creates wider spreads between the strike price and the starting price, resulting in the potential for higher income from option premiums.

Risks to JEPI include higher than expected interest rates, which can negatively impact stock prices. Also, while job market is currently strong, a recession could reverse job growth quickly into job losses, which can also negatively impact stock prices. Lastly, while JEPI's strategy has worked out well so far, increased competition around JEPI's strategy or management turnover could result in lower returns.

Investor Takeaway

JEPI provides investors with an appealing 10.6% yield, while giving investors the stability of a number of moat-worthy names in the S&P 500 index. It also carries lower risk than the market average, considering that its top 10 holdings have relatively far less influence over the entire portfolio. As such, investors who want to stay invested in the market while also getting healthy profits from it may want to consider JEPI for a well-diversified portfolio.

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