JEPI - JEPI: Go Overweight As Volatility Kicks Up

2023-08-20 09:00:00 ET

Summary

• JPMorgan Equity Premium Income ETF generates alpha during market volatility and has outperformed the S&P 500 in August.
• JEPI has significant assets under management and a low expense ratio, making it an attractive option for investors.
• The fund's portfolio is diversified and has a lower standard deviation compared to the S&P 500, making it a potentially less volatile investment option.
• As rates creep higher and with underperformance among mega-cap tech stocks, JEPI should outperform in my view.
• I outline key price levels to monitor on the chart.

The JPMorgan Equity Premium Income ETF (JEPI) has been around for more than three years now. We have some idea of how the fund performs relative to the S&P 500 through a few market cycles since Q2 of 2020. It generates alpha during various market scenarios, but mainly it's when the mega-cap tech-related stocks are not leading equities higher. JEPI’s total return, black in the chart below, shows that the ETF has just recently pulled back from a total return all-time high. During that period, though, it has outperformed the SPX. This is similar to what we saw during much of 2022 when stock market volatility was elevated and the so-called “Magnificent Seven” were underselling pressure.

I have a buy rating on JEPI. I like its current portfolio for a different market regime (compared to the first five months of the year) that we may be in for the next few months.

JEPI: Alpha During Market Volatility, Shares Beating SPX In August

According to the issuer , JEPI generates income through a combination of selling options and investing in U.S. large cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. The ETF’s managers construct a diversified, low volatility equity portfolio through a proprietary research process designed to identify over- and undervalued stocks with attractive risk/return characteristics. Overall, the JEPI seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income.

JEPI has gathered significant assets over the past several quarters. Its assets under management now sum to more than $28 billion as of August 18, 2023. And with a low to moderate expense ratio of just 0.35%, investors can capture the fund’s option-selling strategy without much cost. From a liquidity standpoint, the fund stands out with more than 4.5 million shares traded daily over the past three months, while its 30-day median bid/ask spread is very tight at just two basis points.

Seeking Alpha’s Quant Rankings give the fund a solid B rating for momentum , but there is nuance to that, as its performance is generally better than the market during corrections. What’s appealing, however, is that risk is quite low with JEPI – over the last year, the fund’s standard deviation is just 13.3% compared to the S&P 500’s 19.0% level (as of July 31, 2023).

Digging into the portfolio, data from Morningstar illustrate that the fund is very much large-cap in nature, but the weighted average market cap among the fund’s 136-equity portfolio is actually less than half that of the SPX. But where the ETF truly stands out is its trailing 12-month dividend yield which stands at 10.2%. As volatility has been on the rise, there is a reasonable chance that the yield can increase further since JEPI sells out-of-the-money call options (higher implied volatility generally translates into more expensive option premium).

JEPI’s portfolio has a price-to-earnings ratio near that of the broader market, but J.P. Morgan Asset Management notes that the portfolio’s EPS growth rate is modestly above that of the S&P 500 (10.53 versus 9.85), making the PEG ratio about the same. JEPI leans to the growth side on the Style Box, but it is underweight key growth-heavy sectors, as I will show next.

JEPI: Portfolio & Factor Profiles

JEPI’s construction process ensures that no single company or group of stocks grows to be an overwhelming part of the fund. In reality, it operates similarly to an equal-weight strategy (while not technically equally weighted). Also take a look at the sector allocation – it is far less weighted in the major “TMT” sectors that dominate the S&P 500. So, there is a relative bent to the value style in addition to its smaller average market cap size. Should the market continue to be led by other areas aside from mega-cap tech, then JEPI should outperform.

JEPI: Not A Cap-Weighted Fund, Less Exposure To High-Growth Tech

Also, this chart from Top Down Charts makes the case that volatility could be on the rise as we head into the back half of Q3. If historical trends play out, then more option premium income would be collected.

Historical Trends Suggest More Volatility On The Way

I also took a look at sector performances since interest rates began to rise . Energy has been the leader, while Information Technology and Consumer Discretionary have been the losers. During that time, JEPI is down just 1.3% (dividends included) while SPY is down more than 4%. I believe the trend of higher rates may persist, which makes JEPI a solid candidate to overweight for long-only equity investors.

Mega-Cap Tech Sectors Leading The Decline Since Yields Began To Jump

JEPI Leading SPX Since Rates Took Off

The Technical Take

I will concede that technical analysis on a very high-yield equity fund like JEPI is not as useful, but we should still glance at the chart to see what price levels are of interest. Notice in the graph below that there is a high amount of volume by price right where shares trade today. So, I assert that where the fund goes from here is important. A rally through the late 2022 peak near $57 would be positive for the bulls, while a further dip under about $53 would give the bears the upper hand.

With a rising long-term 200-day moving average, however, the bulls are in control. Of course, considering the high monthly distributions, it’s obvious that JEPI has had robust relative strength in the last two years, and it has just recently taken a notch higher amid a rise in Treasury yields. I also notice that volume has steadied over time in JEPI – it burst on the scene and gained prominence through early 2023, but some underperformance during the S&P 500 rally through July took some of the glamour out of the fund.

Overall, the technical and volume setups are encouraging in my view, but I would like to see the fund rally through $57.

JEPI: High Volume Near the Current Price, Monitor Upside Resistance and Downside Support Levels

The Bottom Line

I have a buy rating on JEPI. I assert we are in a stretch of rising interest rates, volatility, and outperformance among more defensive and less-growth-heavy areas of the market.

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