JEPI - JEPY: The Sexy JEPI

2023-09-20 15:00:00 ET

Summary

• JPMorgan Equity Premium Income ETF has ballooned in popularity since its launch in 2020.
• The JEPI ETF generates higher income by selling out-of-the-money S&P 500 Index call options, yielding a distribution of 9.7%.
• The upcoming Defiance S&P 500 Enhanced Options Income ETF, or JEPY, aims to offer a yield of over 30% by selling short-term in-the-money put options.

In 2020, the JPMorgan Equity Premium Income ETF (JEPI) hit the ground running, and the exchange-traded fund quickly became very popular in a short period of time.

Since launching in 2020, JEPI began with assets under management in the low single digits in terms of AUM, but since then you can see how the AUM for JEPI has ballooned.

For those of you unfamiliar with JEPI, the ETF owns underlying S&P 500 (SP500) positions, but it also takes an additional strategy by selling out-of-the-money S&P 500 Index call options in order to generate higher amounts of income.

Here is a recent article .

Speaking of the distribution, JEPI currently yields a distribution of 9.7%.

The majority of that yield is generated from the derivatives, with the remainder being related to actual dividends from the underlying stocks the ETF owns. The fund pays out its dividend every month.

Many people like JEPI strictly for the yield alone, utilizing the ETF as purely an income play.

However, what if I told you there is a new ETF coming out with a yield north of 30% . This new ETF is referred to as "the sexy JEPI" as it has a ticker symbol of JEPY and is named the Defiance S&P 500 Enhanced Options Income ETF (JEPY).

This new ETF is taking the pure-play income play to another level. The fund's primary objective is to seek current income. JEPY is set to launch soon, as such, we have spoken with the team handling the ETF, and we wanted to help make you aware of this exciting new product.

Here is a look at the strategy for JEPY:

Every day, the Fund will sell put options that are priced either at-the-money or up to five percent in-the-money (i.e., higher than the current market price). If the Fund sells an option that's priced above the current market price, the Fund may profit if the Index increases in value above its current price.

This opportunity exists until the option's expiration date, which is typically the next day. This happens because an option priced above the current market value has a higher premium than an option priced at the current market value.

In other words, the Fund's potential for profit (or exposure) fluctuates. This potential for profit is calculated daily over a certain time period, but it's also balanced out by any losses that might occur during that same period.

So you might be asking, what does all this mean in layman's terms.

The ETF is utilizing options, particular writing put options with 1 day to expiration.

For those of you unfamiliar with options, selling a put option gives the option buyer, the person who pays the seller for the option, the right to sell the underlying Index or stock to you at the predetermined expiration date, which is usually right at where the underlying position is trading at for the close of the prior day.

On the flip side, the option seller, JEPY in this case, collects a premium. If the underlying index increases, JEPY earns 100% of the premium they collected. If, however, the index price falls below the strike price, JEPY would have to pay the option buyer the difference between the index price and the strike price of the option.

Now that you understand the strategy, and how JEPY sells very short-term put options, you may be asking yourself how they are able to generate a yield that is expected to be above 30%.

The Fund is able to generate a higher yield than traditional option-based strategies, like those utilized by JEPI, due to the fact they are selling in the money puts with less than 1 day until expiration.

The ETF focuses on just one contract per day and any additional cash will be used to hold short-term US treasuries for collateral and to generate further income.

Given that JEPY, like JEPI, is an actively-managed ETF, always selling an option contract every day, the expense ratio is expected to be higher than a passively-managed ETF.

JEPY will have an initial expense ratio of 0.99% , which is expected to be an afterthought with the yield JEPY is expected to generate. That distribution will be paid out on a monthly basis, just like JEPI.

To recap, JEPY is a new income ETF hitting the market that will focus on generating an "enhanced yield" for its investors by using their three-tiered building blocks:

1. Less than 1 day DTE: Short term option expirations can generate higher yields and it also allows the fund managers to do this on a regular basis.
2. Put Write - The ETF managers will be selling slightly in-the-money put options to generate more yield.
3. Actively-Managed - Although actively-managed ETFs come with a much higher expense ratio, the JEPY team believe the enhanced yield will more than pay for the higher expense ratio.

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