MSFT - JEPI: High Yield And Superior Risk-Adjusted Returns - Still Need More?

2023-09-18 16:00:00 ET

Summary

• JPMorgan Equity Premium Income ETF is a high-yielding ETF aiming to provide investors with capital appreciation and regular monthly dividend income.
• Despite its lack of price appreciation since my April update, its solid total return underscores the robustness of its overall strategy.
• The fund is defensively configured. Despite that, it has outperformed its peers on a risk-adjusted basis.
• I gleaned that JEPI has resumed its uptrend bias. With recent market volatility affecting the market, JEPI has held up well.
• I make the case for why investors looking to buy more JEPI should capitalize on the current levels to add.

I last updated The JPMorgan Equity Premium Income ETF ( JEPI ) investors in April, downgrading it to Hold, as I anticipated its recovery momentum to peter out. That thesis has panned out, as JEPI has failed to break above its January 2023 highs over the past five to six months on price-performance terms.

Notwithstanding the sideways price action, JEPI's income investors have continued to benefit from its covered-call strategy (based on premiums written on ELNs). Accordingly, JEPI delivered a total return of 5% since my previous update, mitigating the 1.7% price-performance upside since then. JEPI's dividend yield remains robust, as it last traded at a TTM yield of 9.7% .

Therefore, I assessed that JEPI fund managers have continued executing its defensively configured strategy despite lacking capital appreciation over the period highlighted. The fund managers updated in its June quarterly commentary , highlighting its overweight exposure in Eli Lilly ( LLY ). Thanks to the surging GLP-1 commercial successes of the healthcare sector leader, JEPI investors have also benefited from its continued outperformance.

JEPI top five holdings as of September 14. Data source: Seeking Alpha

The top five holdings have also undergone significant changes since my April update, with Mastercard stock as the only unchanged constituent. As such, JEPI fund managers have also leveraged the broad risk-on market recovery, as seen above. Management also highlighted their overweight exposure in Adobe, underpinned by the "enthusiasm surrounding generative AI."

As such, I'm not surprised that JEPI has continued outperforming its benchmark, as seen above, delivering superior risk-adjusted returns above its category and index peers. As a reminder, JEPI's portfolio strategy is predicated on a " defensive equity portfolio strategy" and "risk-adjusted" stock selection. As such, I believe JEPI managers have performed well. Comparison must be made to its appropriate index and category peers, not the S&P 500 ( SPX ) ( SPY ).

Moving forward, the fund's covered-call strategy could be under further stress if the S&P VIX Index ( VIX ) continues to trade lower. As seen above, the VIX's downtrend bias is consistent with typical bull market behavior, as it normalizes from the surge toward its September 2022 highs before the market bottom in October 2022.

Even though the S&P 500 experienced volatility recently as the market pulled back from its August 2023 highs, the VIX did not demonstrate a sharp surge in September (yet). As such, investors seemed ready to continue the medium-term uptrend bias on the S&P 500, suggesting a continuation of the downtrending VIX.

Despite that, I gleaned a consolidation zone over the past three months, suggesting there could be a short-term rebound in the VIX, leading to higher volatility.

In addition, the bottoming process in the VIX corresponds with the consolidation zone observed in JEPI's price chart. I assessed that JEPI has regained its uptrend bias and is ready to resume its upward trajectory after a nearly five-month consolidation zone.

The recent pullback from its July 2023 highs also affected JEPI, but its covered call strategy helped mitigate the near-term downside, as the VIX also consolidated constructively.

With that in mind, I'm ready to upgrade my rating on JEPI, encouraging holders to accumulate.

Rating: Upgraded to Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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