JEPI - JEPI Vs. FTHI: The More Popular ETF Is The Better Choice

2023-07-20 08:00:00 ET

Summary

• Both JPMorgan Equity Premium Income ETF and Invesco S&P 500 BuyWrite ETF focus on Large-Cap stocks and aim to provide income, but they use different option strategies to that end.
• This article reviews both ETFs in depth and compares each's CAGR based on whether dividends were taken or reinvested.
• For income investors still wanting some equity exposure, I would give the JPMorgan Equity Premium Income ETF a BUY rating.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

Income and possible capital gains are two of the goals set by both the JPMorgan Equity Premium Income ETF ( JEPI ) and the First Trust BuyWrite Income ETF ( FTHI ). Both focus on a similar set of Large-Cap stocks, but employ different option strategies to earn the generous yields both provide to investors. What investors do with those dividends, however, can affect which of these ETFs provides the better level of income and returns so knowing what your income needs are can be important in deciding between these ETFs. Between these two ETFs, the JEPI ETF is the better choice.

JPMorgan Equity Premium Income ETF review

Seeking Alpha describes this ETF as:

The investment seeks current income while maintaining prospects for capital appreciation. It invests in growth and value stocks of companies across diversified market capitalization. It invests in stocks of companies that are deemed socially conscious in their business dealings and directly promote environmental responsibility. The fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the fund's primary benchmark, the Standard & Poor's 500 Total Return Index (S&P 500 Index) and (2) through equity-linked notes (ELNs), selling call options with exposure to the S&P 500 Index. JEPI started in 2020.

Source: seekingalpha.com JEPI

JEPI has $28.1b in AUM and shows a TTM yield of 10.45%, but has a current yield of 8%. Fees are 35bps.

JP Morgan lists the following as the goals of their ETF:

JEPI holdings review

A distinctive element of the ETF's investment approach is thru holding Equity Linked Notes, known as ELNs. Here is one definition of ELNs and what they provide investors with.

An equity-linked note ((ELN)) is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity. ELNs can be structured in many different ways.

Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped.

Source: investopedia.com ELNs

JPMorgan includes the following risks associated with ELNs:

Investments in Equity-Linked Notes (ELNs) are subject to liquidity risk, which may make ELNs difficult to sell and value. Lack of liquidity may also cause the value of the ELN to decline. Since ELNs are in note form, they are subject to certain debt securities risks, such as credit or counterparty risk. Should the prices of the underlying instruments move in an unexpected manner, the Fund may not achieve the anticipated benefits of an investment in an ELN, and may realize losses, which could be significant and could include the Fund's entire principal investment. The price of equity securities may fluctuate rapidly or unpredictably due to factors affecting individual companies, as well as changes in economic or political conditions. These price movements may result in loss of your investment.

Source: am.jpmorgan.com JEPI Factsheet

This is how the JEPI ETF Prospectus describes the ELNs held by the ETF (edited by me for simplicity).

ELNs are derivative instruments that are specially designed to combine the economic characteristics of the S&P500 Index and written call options in a single note form and are not traded on an exchange. The options underlying the ELNs will be based on the Benchmark or ETFs that replicate the S&P 500 Index. The ELNs owned by the Fund are structured to use a covered call strategy and have short call positions embedded within them. The Fund is entitled to the premium generated by the short call position within the ELN.

Therefore, the ELNs provide premiums received from selling the call options and are an important source of the Fund's return. When the Fund sells call options within an ELN, it receives a premium but limits its opportunity to profit to the difference between the exercise price and the purchase price of the underlying benchmark or ETF at the time the option is written, plus the premium received.

The ELNs are reset periodically to seek to better capitalize on current market conditions and opportunities; these resets assist the Fund in seeking to provide relatively stable returns.

Source: am.jpmorgan.com JEPI Prospectus

Sector allocation, including ELNs

Even adjusting for the ELN weighting, JEPI's selection criteria shifts the sector weights from a standard S&P 500 Index ETF.

Top equity holdings

JEPI holds 119 equities, of which 118 are in the S&P 500 Index.

ELN holdings

JEPI has owned ELNs based on the NASDAQ 100 Index in the past.

JEPI distributions review

The monthly payout has dropped from about $.57 at the end of 2022 to just under $.36 for the July payout. One reason for this has to be related to a reduction in option premiums earned caused by lower market volatility, as can be seen in the next chart. Nothing I saw indicates payouts were sourced from ROC, which can happen with straight option-writing ETFs.

Historical lows for the VIX Index have been near 10, and the Index dipped below 13 before the recent uptick. This could limit JEPI's ability to increase payouts in the near future. Nevertheless, Seeking Alpha gives the ETF an "A+" grade for its dividend history.

First Trust BuyWrite Income ETF review

Seeking Alpha describes this ETF as:

The investment seeks current income; capital appreciation is a secondary objective. The fund will pursue its objectives by investing primarily in equity securities listed on U.S. exchanges and by utilizing an "option strategy" consisting of writing (selling) U.S. exchange-traded call options on the Standard & Poor's 500® Index (the "index"). The call options written by the fund will be a laddered portfolio of call options with expirations of less than one year, written at-the-money to slightly out-of-the-money. Benchmark: CBOE S&P 500 BuyWrite BXM PR Index . FTHI started in 2014.

Source: seekingalpha.com FTHI

FTHI has $211m in AUM and has a high fee for an index-based ETF of 85bps. The Forward Yield is 8.6%.

Index review

The BMX Index series comes with this description.

The BXM Index measures the total rate of return of a hypothetical "covered call" strategy applied to the S&P 500 Index. This strategy consists of a hypothetical portfolio consisting of a "long" position indexed to the S&P 500 Index on which are deemed sold a succession of one-month, at-the-money call options on the S&P 500 Index listed on the Cboe exchange.

Source: cdn.cboe.com BXM indices

FTHI holdings review

Here, the sectors align more with the S&P 500 Index with Technology and Real Estate having the widest differences.

Top 20 holdings

Only one stock has a weight difference over 1%; almost all are below .5% when compared to the S&P 500 index weights. As of today, the written Call options on the S&P 500 index are the following:

FTHI has already started rolling their option exposure forward to August. As I write this, each of these options are ITM and will need to be either rolled or closed out before the date listed in the first column.

FTHI distribution review

For the years 2020-22, between 67-85% of the payouts have come from ROC. Despite efforts on my part, I could not find why FTHI nearly doubled their payout in early 2022. I'm sure that played a giant role in getting an "A+" grade from Seeking Alpha.

Comparing ETFs

Besides the different strategy to enhance their income for investors, the underlying assets held also show allocation differences to consider. I included the Vanguard S&P 500 ETF ( VOO ) as a reference point.

FTHI has more weight in pure Growth and Value stocks, whereas JEPI has more in what are labeled Blend stocks. FTHI has slightly more Large-Cap allocation too.

To some surprise for two ETFs who invest in what I thought was the same universe of stocks, the sector weights differ and the number of same stocks in each ETF is small.

Some common equity factors favor FTHI for the Value ones, JEPI for the Growth ones.

For the next data set, I will use the JPMorgan Equity Premium Income Fund ( JEPIX ) as it invests the same but has longer history.

Except for a slightly worse StdDev, JEPIX, thus JEPI most likely, has superior values since the fall of 2018 when JEPIX started. The next chart shows JEPIX had shallower drawdowns than FTHI did.

Dividend reinvestment analysis

If one buys high yielding investments because they need the cash flow, then examining how that effects the total return on that holding should be done. Here, JEPI is the better ETF in both cases, which is not always true.

The CAGR difference between the ETFs was less when the investor took the dividends and also, in both cases, less total income was generated as the share count would be lower when not reinvesting.

Portfolio strategy

Between the JEPI ETF and the FTHI ETF, the first one has been the superior choice since May of 2020 when JEPI started. That stays true when comparing JEPIX against FTHI with the extra years of history. For income investors still wanting some equity exposure, I would give the JPMorgan Equity Premium Income ETF a BUY rating.

Besides that recommendation, here are some other takeaways that apply regardless.

• Know why you are considering the investment. Is it for income, a short or long-term possible holding, or possibly to plug an allocation hole in your overall portfolio?
• Are you planning to take or reinvest the payouts? While the difference here was minor, I found that is not always the case ( article link ). Related, be sure you understand how the site does the calculations. Portfolio Visualizer seems to ignore the payouts completely when reinvestment is inactive.
• For funds that invest in assets other than stocks and bonds, as these do, read the Prospectus to understand the risks you are taking on that might be unique to that fund. Option writing can cap the upside; assets like ELNs and ETNs have issuer risk beyond the fund that holds them. Funds that use Futures have a whole other set of risks to consider.

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