JEPI ETF: This Should Be A Special Year For This Fund

Finding good investments that offer solid returns and stable income has become much harder over the last several years. With inflation and interest rates at higher levels, the economy slowing, and political uncertainty in the US and around the world, allocating capital has become much more challenging.

Dividend investing has become more common over the last decade with interest rates often being at historically low levels, and exchange-traded fund that focus on income have become more commonplace as well. One of the most popular dividend and income funds in the market is the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI). This is JPMorgan’s flagship dividend and income fund, and this ETF invests nearly 85% of the fund’s assets in equity securities. The fund then sells equity linked notes against the core holdings. ELNs are a form of option contract, or options to buy or sell securities that the fund owns.

These ELNs limit the upside of the fund because the managers are selling off some of the upside of the securities they own in exchange for a more steady stream of income. The options being sold are one month out of the money, so investors still get some upside in the fund’s equities, and the volatility premiums tend to be higher than at-the-money option or in-the-money options. JEPI most sells call options going out one month, but the fund reserves the right to sell shorter-term options when the managers think market conditions are suitable for that strategy.

JEPI has offered investors total returns of 58.47% since the fund’s inception in May of 2020, while the S&P 500 (SPY) has offered investors total returns of 89.79% during that same time period.

I last wrote about JEPI in August of 2022, and I rated the fund a buy. I am changing my rating today to strong buy. JEPI performs best when there are above average levels of volatility, because that condition mean the options the fund sells of higher implied volatility premiums. Investors don’t want excessive volatility tough, because the fund is selling off upside without downside protection. This ETF performs best when the market is range bound with elevated levels of volatility, which is the condition we are likely to see for most of this year as markets face economic and political uncertainty. The conflicts in the Middle East and between Russia and Ukraine are also likely to create more uncertainty as well.

JEPI is invested 80% in securities, and 20% in exchange-traded notes. The fund allocates assets 18.9% to the technology sector, 14.26% to the health care sector, 13.95% to the industrial sector, 13.15% to the financial sector, 12.09% to consumer defensives, 8.87% to consumer cyclicals, 4.84% to communication stocks, 4.6% to the communication sector, 4.5% to utilities, 3.22% to utilities, 3.17% to basic materials, and 3.16% to the energy sector.

JEPI’s top holdings are Progressive (PGR), Amazon (AMZN), Meta Platforms Inc. Class A (META), and Microsoft (MSFT), but the fund does not have a single equity holding that comprises more than 1.77% of the ETF’s portfolio.

The fund also has a reasonably low expense ratio of .35% given how actively managed this ETF is. The total assets under management are $32.61 billion. JEPI is effectively underweight inflation because of the fund’s limited exposure to energy and basic materials, as well as more cyclical sectors. This asset allocation is the primary reason the fund has underperformed the S&P 500 in 2021 and 2022.

Still, JEPI has paid out impressive income since the fund’s inception in 2020, and the ETF has also paid out particularly steady payments over the last year.

JEPI paid out $4.47 last year, and the company has a trailing yield of 7.86%. The fund’s monthly payment is very primarily based on the income ETF generates selling monthly options, so the current listed yield is not indicative of likely future income for investors. Even though the VIX has sold off nearly 35% in the last year, volatility levels should rise in 2024 for multiple reasons.

JEPI the fund has not been that volatile over the last year. The ETF has a standard deviation of 11.66, which is lower than average.

Even though this JPMorgan fund has consistently underperformed the S&P 500, the ETF has still paid out stable and solid income since the fund’s inception in 2020. This fund paid out nearly $5.19 income in 2022, for a yield of nearly 13% and the ETF paid out nearly 8% over the past year. The fund paid out nearly 9% per year in income from 2020 to early 2023.

The strategy of selling covered calls or exchange-traded notes works best in a range-bound market when volatility is at an elevated level, since in this kind of market environment the value of the premium in the options being sold is elevated, but little to no upside in the underlying owned securities is lost. This strategy should work well in a market that is dealing with political uncertainty and economic uncertainty, as well as heightened tensions globally. In the US the upcoming presidential election should create additional volatility, while economically, 2024 is still predicted to be a slow growth year. Economists are still predicting 2024 to be a slow growth time. The Fed also likely won’t want to be seen as interfering in the election, and prices remain high even though the rate of inflation has moderated to nearly 3%.

All investments have risks, and JEPI does sell off a significant amount of the upside of the equities the fund owns, while not protecting downside risk. Still, this fund should be better positioned in the current market environment than peers such as the Global X Nasdaq 100 Covered Call ETF (QYLD) and Global X S&P 500 Covered Call ETF (XYLD) that sell at the money options that tend to be less volatile than the out of the money calls JEPI sells.

JEPI underperformed in 2023 primarily because volatility rates fell significantly at the end of last year, but there are multiple reasons to believe the uncertainty levels will rise again this year. While JEPI won’t likely offer investors significant total returns over the long term, this fund is still very well positioned in the current market environment to offer steady and solid income.