JEPI - JEPI: Why I Am Making An Aggressive Bet On This 8.7%-Yielding ETF

2023-12-05 10:02:52 ET

Summary

• JPMorgan Equity Premium Income ETF is a promising high-yield, covered call ETF.
• JEPI has achieved high returns since its launch in 2020 and currently offers an 8.7% yield.
• The ETF is broadly diversified, including core S&P 500 stock holdings, and is attractive for income-focused investors because of the application of a covered call option strategy.
• However, the ETF may not be suitable for investors following a growth-centered investment approach or are looking for exposure to small-caps or non-U.S. large-caps.

The JPMorgan Equity Premium Income ETF ( JEPI ) has a dual-purpose investment strategy: the ETF invests in companies included in the S&P 500 index, but the ETF also uses a covered call writing strategy to create additional dividend potential for investors. At its core, the JPMorgan Equity Premium Income ETF, therefore, owns a portfolio of value stocks that generate recurring dividend income and the ETF has already earned, with its relatively limited performance history, four out of five stars from Morningstar in its category. The JPMorgan Equity Premium Income currently supplies an 8.7% 30-day SEC yield and although JEPI has not produced a positive price return so far this year, the ETF is an attractive investment, in my opinion, for long-term dividend investors!

Dual-purpose ETF objective, fund returns, S&P 500 comparison

The JPMorgan Equity Premium Income ETF was started in May 2020 which implies that the ETF has a relatively short investment history.

JEPI is an actively-managed ETF that invests in U.S. large-cap stocks with attractive risk/return characteristics and, in addition to that, generates income through the use of a covered call strategy. A covered call strategy is an options trading strategy where the owner of an underlying asset, such as an S&P 500 stock, sells call options to generate distributable income. The strategy is called "covered" because the seller of the option, JEPI, already owns the asset and therefore is in a position to deliver the asset should the option get exercised.

Covered call ETFs like the JPMorgan Equity Premium Income ETF use these strategies simply as a way to generate income for the ETF. Besides collecting option premiums, other sources of income include stock dividends that are paid by the ETF's holdings as well as profits stemming from stock sales.

Although the JPMorgan Equity Premium Income ETF is a relatively young ETF, so far the performance track record looks good. Since its launch 3 years ago, the JPMorgan Equity Premium Income ETF has returned approximately 11% annually.

The JPMorgan Equity Premium Income ETF did underperform the S&P 500 since its inception, but given that the ETF uses a covered call writing strategy, the S&P 500 is not the benchmark index, however.

ETF size, diversification, investment suitability

The JPMorgan Equity Premium Income ETF has about $30.3B in investment assets, and the portfolio included 134 different portfolio holdings as of 12/01/2023. The ETF itself has very solid diversification: despite being JEPI's top investment, Microsoft ( MSFT ) has a relatively low investment share of 1.76% in the ETF. The chart below shows the ETF's top ten holdings as of the beginning of December.

Clearly, investors with a desire for income generation may want to consider the JPMorgan Equity Premium Income ETF as a potential investment holding. The ETF's portfolio is broadly diversified and focuses on S&P 500 index-included constituents... which implies that only the largest U.S. large-caps can become ETF holdings. The covered call strategy is attractive for dividend investors because it enhances the ETF's distribution potential, which comes on top of a low-volatility equity portfolio that is made up of U.S. large-caps.

The JEPI is paying its distribution monthly and the most recent distribution was $0.39 per share. The monthly distribution in the last year has varied widely, but the average monthly distribution calculated to $0.35 per share. The current yield for the JPMorgan Equity Premium Income ETF yield is 8.7%.

A long-term bet on U.S. large-caps

The JPMorgan Equity Premium Income ETF has grown its portfolio value at an about 11% annual average rate since it was launched in 2020. The ETF's net asset value, which is reported daily, was $54.53 per share as of 12/01/2023, showing a 0.03% premium to NAV. Considering that JEPI is a long-oriented ETF and that its portfolio consists of U.S. large-caps included in the S&P 500, my expectation is for the JPMorgan Equity Premium Income ETF's net asset value to grow in the long term as well.

Drawbacks and risks associated with buying JEPI

JEPI is an income and distribution-oriented ETF, and therefore, not especially suited for investors that follow a growth strategy. Additionally, the JPMorgan Equity Premium Income ETF is focused on large-cap S&P 500 stocks, so investors looking to enhance their total return potential through the inclusion of high-growth, promising small-caps are missing out here. A third risk that I see with the JPMorgan Equity Premium Income ETF is that the ETF is U.S.-focused, so in that sense, the ETF ignores income opportunities from markets outside of the U.S. Lastly, JEPI has a short performance history and still needs to prove itself over longer time horizons.

Final thoughts

The JPMorgan Equity Premium Income is a high-yield, covered call ETF that represents considerable income potential for long-term investors. The appeal for the JPMorgan Equity Premium Income ETF is the underlying portfolio of value stocks, whose values should broadly develop in line with the S&P 500 index. The combination of U.S. large-cap investments with high-yield return possibilities is what I like the most about JEPI and why I bought the ETF aggressively last week.

The covered call writing strategy benefits investors because the ETF is capable of generating additional income, which boosts the distribution potential of the JPMorgan Equity Premium Income ETF. Since the ETF includes some of the largest U.S. companies, JEPI is essentially an income bet on core S&P 500 constituents!

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