Broadening Stock Market Gains Favors JEPI ETF (NYSEARCA:JEPI)

The last year has primarily been a period of relative strength for mega-cap tech stocks. Strategies focused on yield and other forms of equity diversification have largely been underperformers. But are trends shifting? Consider that the Magnificent Seven stocks have undergone significant diverging single-stock performances, with shares of Apple (AAPL), Tesla (TSLA), and more recently, Alphabet (GOOGL), losing relative ground.

With money seemingly being reallocated across the stock spectrum, I assert going overweight the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) is a prudent play heading into the final month of the first quarter, and beyond for that matter. I previously outlined an “overweight JEPI” strategy during the middle of last year as the August through late October correction got underway.

JEPI Has Underperformed the Tech-Heavy S&P 500 Over the Past 12 Months

According to the issuer, JEPI generates income through a combination of selling options and investing in U.S. large-cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. The ETF’s managers construct a diversified, low-volatility equity portfolio through a proprietary research process designed to identify over- and undervalued stocks with attractive risk/return characteristics. Overall, JEPI seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income.

What makes now a compelling time to go overweight JEPI is that March tends to see volatility increase. The chart below from Jeffrey Hirsch from Stock Trader’s Almanac reveals that while we have seen an unusually strong start to this election year, a correction commonly develops as the end of the first quarter approaches. This trend tells me that harvesting gains in more risk-on areas of your portfolio and focusing on a bit more safety could be the way to play it.

March Volatility is Common During Election Years

As it stands, JEPI’s total assets under management have swelled to more than $32 billion, up from $28 billion last summer. But share-price momentum has been somewhat soft in recent months while the broad US stock market has rallied. With a reasonable 0.35% annual expense ratio, JEPI is not all that expensive, and its trailing 12-month dividend yield is high, near 8%.

I would like to see implied volatility levels increase so that more option premium can be collected, but JEPI’s payout rate is more than six percentage points higher than that of the S&P 500. Risk metrics are likewise attractive, as JEPI normally features less volatility than the SPX and its portfolio is much more diversified given its weighting scheme – it’s not strictly cap-weighted like the S&P 500. Finally, the ETF has very strong liquidity metrics – average daily volume is above 3.5 million while the fund’s 30-day median bid/ask spread is just two basis points, according to J.P. Morgan Asset Management as of February 27, 2024.

I like JEPI right now, since there has been a broadening out in the US stock market. Per Seeking Alpha’s sector performance summary, the Consumer Discretionary sector is the best-performing area, followed by the cyclical Industrials sector and the part-defensive, part-aggressive Health Care space. Biotech’s recent surge has helped Health Care in the last month. Tech, meanwhile, is up just 2% over the past month.

1-Month Stock Market Returns Broadening Out

JEPI, a 5-star, Bronze-rated ETF by Morningstar plots along the top part of the style box, indicating that it’s primarily a large-cap allocation. But there is a significant position in mid-cap stocks. So, there is some size diversification benefit.

While the ETF’s price-to-earnings ratio is above 20, the portfolio boasts a long-term EPS growth rate above 10%. The resulting PEG ratio is not particularly high, however. What I do like, factor-wise, is that JEPI has historically been a low-volatility fund, helping investors weather volatility in the market over recent years.

JEPI: Portfolio & Factor Profiles

The largest sector weight in JEPI is Information Technology, but that does not tell the true story here. Consider that I.T. is now close to 30% of the S&P 500. Furthermore, five sectors comprise at least a 12% stake in this ETF, underscoring its diversification. Finally, JEPI’s top 10 holdings account for just 19% of the total portfolio, helping to cut down on material single-stock risk.

JEPI: Holdings & Dividend Information

The Technical Take

With a somewhat lofty valuation but attractive allocation ahead of what can be a dicey stretch in the stock market, JEPI’s technical pattern is generally constructive. I concede that analyzing technical price action with an income-oriented fund like JEPI is not as useful compared to doing so with a traditional fund, but we can still garner some momentum clues here. Notice in the chart below that the ETF has broken out from a downtrend resistance line that proved problematic for the bulls on a handful of occasions from late 2021 through earlier this year.

With a long-term moving average that is now trending higher, the bulls appear to be in control. Moreover, there is now a significant amount of volume by price underneath the latest share price, suggesting that there may be ample buying pressure on pullbacks. Finally, take a look at the RSI momentum oscillator at the top of the graph – it has been ranging in the bullish 40 to 80 range. That tells me that while JEPI’s share price has been on the rise, it has been a steady and strong ascent, supporting further gains.

Overall, while JEPI remains considerably below its peak close to $64, the fund has broken to the upside.

JEPI: Bullish Upside Breakout, Strong RSI Momentum Readings

The Bottom Line

I reiterate my buy rating on JEPI. Like the strategy I outlined last summer, now appears to be a good time to go overweight a more conservative, income-focused fund like JEPI as opposed to the risk-on and tech-heavy S&P 500.