JEPI - JEPI Vs. SCHD: Which Dividend ETF Is The Better Buy

Summary

• The JPMorgan Premium Equity Income ETF pays a monthly high-yield distribution that income investors love.
• The Schwab US Dividend ETF has become a fan favorite for dividend investors as it can be a triple threat.
• Let's break down the similarities and differences between the two to determine which ETF is the better buy.

ETFs or Exchange Traded Funds are one of the greatest ways to build wealth for both hands on and hands off investors. A well-rounded ETF can and should be the backbone of any successful portfolio.

The great thing about ETFs is they are a great for ANY type of investor:

• They add diversification to your portfolio
• They offer less risk than individual stocks
• They can also be great as a hands off type of investment

Warren Buffett has always stated that every investor should start with a broad S&P 500 ETF or Index Fund when beginning their investing journey.

ETFs and Index Funds are a LASTING investment, and there are thousands to choose from as they come in all shapes and sizes.

One researching ETFs, one important note to make is to be aware of expense fees. These fees are what the brokerages charge investors for offering the product. Actively managed ETFs tend to have much higher expense fees than passively managed ETFs. These fees are shown as a percentage, which is then calculated based on your investment within the fund. Costs can play a HUGE role on your total returns, so beware of high cost funds, especially if they do not perform.

Today, we are going to look at two of the most popular dividend ETFs: the JPMorgan Premium Income ETF ( JEPI ) and the Schwab US Dividend ETF ( SCHD ).

How Each ETF Is Built

JEPI: JPMorgan Premium Equity ETF

Let's begin with JEPI, which is an ETF that has exploded onto the scene of late. JEPI has become very popular among retail investors due to their high-yield distribution.

JEPI is the JPMorgan Premium Equity ETF. The makeup of JEPI is much different from your average dividend ETF. JEPI pays a VERY high yield of 11.5% and they have an expense ratio of 0.35% which is on the higher side. The ETF has roughly $19 billion in assets under management.

Not only does the ETF pay a very high-yield, but they also distribute dividends on a MONTHLY basis.

The fund is managed by two fund managers with more than 60 years combined experience. It is actively managed, which is why we see the higher expense fee of 0.35%.

JEPI take a different approach than most regular equity ETFs. Instead of just buying and selling equities, JEPI adds in another wrinkle by also selling out of the money S&P 500 call options to help generate a higher yield.

They also characterize themselves as a lower volatility ETF, and although lower volatility can be nice during rough patches like we saw in 2022, but the way JEPI is built can also cap the upside for the ETF.

For those of you unaware, a covered call is where you leverage your current positions with an option to potentially sell those stocks at a higher price called the strike price. If the stock price surpasses that strike price prior to expiration of the option, the option seller, JEPI in this case, would not partake in any of the gains above the strike and they would agree to sell their position to the option buyer at the strike price.

JEPI also utilizes what is called Equity Linked Notes, or ELNs, which can be thought of as a combination of fixed income and returns from equities, which can be turned into covered call premiums. There are more nuances that go into ELNs which bring added risk as well, but they also mask the actual options the ETF is entering, which is not something I personally like.

SCHD: Schwab US Dividend Equity ETF

Now let's take a closer look at a more traditional dividend focused ETF in SCHD. SCHD is another dividend focused ETF that is popular among dividend investors, but it does not have the complexities that come with JEPI, instead SCHD buys and holds US dividend stocks.

As we will see down in the top holdings section below, SCHD holds a broad range of dividend stocks from higher yield down to dividend growth, and it gives investors a great mix, which is one reason it has performed so well.

The objective of the ETF is to track the total return of the Dow Jones Industrial US Dividend 100 Index.

SCHD currently has over $45 billion in assets under management and they have a low expense ratio of 0.06% , making it a low cost fund. This is more of a passively managed ETF, which is why they are able to keep the cost low.

As I mentioned, SCHD has a broad range of holdings, which has created a unique blend of a nice dividend yield combined with strong dividend growth. SCHD currently yields a dividend of 3.35% and has a 5-year dividend growth rate of roughly 14% . The dividend has increased for 10 consecutive years.

Top Holdings and Sectors

JEPI Top Holdings

JEPI Sector Breakdown

SCHD Top Holdings

SCHD Sector Breakdown

As you can see, the two ETFs only share Coca-Cola Co ( KO ) amongst their top 10 holdings. SCHD and JEPI are similar with their top 2 sector exposure being to financials and industrials, but after that is where things go their separate ways. SCHD also has larger exposure to its top sectors, which are more defensive in nature.

Comparing Performance

Here is a look at how both ETFs have performed from a total return basis over the past 3 years.

As you can see, SCHD has far outperformed JEPI and the S&P 500. Meanwhile JEPI, was nearly lockstep with the S&P 500 the past 3 years.

Which ETF Do I Prefer

In terms of strategy, some would say the 2 are similar in many ways but they are organized very differently. JEPI is focused more on INCOME and depending on where you are at in terms of investing horizon, income may be your goal at this stage, as you are getting a double digit yield but you have limited upside due to the covered call and ELN strategy they imply.

SCHD on the other hand is investing strictly in individual dividend focused stocks, so although you have higher upside, you also have lower yield and naturally higher volatility.

With that being said, I much prefer the likes of SCHD. I am a long-term investor and want the higher upside, but I can see why investors like the higher yield in the near-term, but the account you hold JEPI in will play a HUGE roll as well, so be aware of that.

Let me know down in the comments section below which of these 2 ETFs you prefer.

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