JEPI: No Longer An Income Investor's Only Holding

Introduction

The JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) is a wildly popular ETF in the options-based ETF market with more than $29 billion in assets under management — and for good reason. The ETF boasts a healthy 9.93% 12-month rolling dividend yield, has exposure to U.S. large-cap stocks, all while prioritizing low volatility for its investors.

However, there are some flaws. In this post, I’ll be comparing JEPI to “the next best thing.” Don’t get me wrong, JEPI deserves a place in most dividend-focused investor portfolios — the real question though is “how big?”

Quick Background

The JPMorgan Equity Premium Income ETF’s investment objective is simple: seek current income while maintaining prospects for capital appreciation.

The Fund seeks to achieve this objective by implementing two unique strategies.

1. Create an actively managed portfolio of equity securities comprised significantly of those included in the Fund’s primary benchmark, the S&P 500 Index.

2. Through equity-linked notes (ELNs), sell call options with exposure to the S&P 500 Index.

The resulting Fund is designed to provide investors with performance that captures a majority of the returns associated with the S&P 500 Index, while exposing investors to lower volatility than the S&P 500 Index and also incremental income.

Plainly speaking, this ETF aims to deliver incremental income to its investors with the potential for capital appreciation while optimizing for low volatility.

But, at what cost?

Performance over the Years

2021 was the first full calendar year JEPI was trading for, so we’ll start there. During 2021, JEPI’s total return was 21.61% — capturing nearly 75% of the total return of the S&P 500’s 28.71%.

2022 was even better, as the S&P 500 experienced immense volatility, JEPI did what it was designed to do — produce incremental income for its investors while exposing investors to lower volatility when compared to the S&P 500.

In 2022, JEPI delivered a total return of -3.54% compared to the S&P 500’s -18.11%. As the markets experienced increased volatility, JEPI was able to leverage its unique “actively-managed” characteristic and begin to lean into less volatile sectors of the stock market until skies turned blue again.

With that being said, 2023 hasn’t been as bright. As of writing this (10/23/23), JEPI’s year-to-date total return has been 3.05% — with shares of the ETF having traded down -3.62%, closing the day at $52.50 per share. Compare this now to the S&P 500’s total return year-to-date of 11.38% — with JEPI having only captured 26% of their benchmark index’s performance thus far in 2023.

2023 has not been a banner year for the ETF as the “Magnificent Seven” continues to propel the S&P 500 higher.

However, if you include performance of both 2021, 2022, and year-to-date 2023 — JEPI has delivered a 21.12% total return for its investors. Compare that figure now to the 21.98% total return of the S&P 500 Index — pretty incredible.

The Next Best Thing

Since 2021, JEPI has proven to continually accomplish its investment objective of delivering incremental income to its investors with the potential for capital appreciation while optimizing for low volatility.

However, during times of immense bullish sentiment (most of 2023) it’s obvious JEPI is unable to keep up with its benchmark index. This is because of the way their management team writes their covered call option contracts as well as the Fund’s underlying holdings. As explained above, this has caused the Fund to only capture 26% of the S&P 500’s year-to-date returns.

To complement JEPI, I’ve introduced the NEOS S&P 500 High Income ETF (SPYI) to my portfolio — a very similar ETF that has been able to capture over 96% of the S&P 500’s total return year-to-date while paying a 12.22% annual distribution yield to its investors.

SPYI’s price action year-to-date has been 1.62%, while paying income of 9.34% — a total return of 10.99%. And after taking into account their tax-efficient strategies — ensuring more is kept in my pockets come tax time by leveraging Section 1256 contracts and tax-loss harvesting — my after-tax returns become increasingly more favorable.

It’s my understanding the main reason why SPYI has been able to outperform JEPI year-to-date has to do with how they write their covered call option contracts. According to their holdings (10/23/22), the Fund is writing covered call option contracts with a strike price roughly 5% “out of the money.”

By writing covered call option contracts “out of the money,” SPYI’s price is able to appreciate in value in rising markets — like the market we’ve experienced thus far in 2023.

A Dynamic Duo

Again, I firmly believe JEPI deserves a place in dividend-focused investors’ portfolios — especially when you take into account their immense outperformance during the volatile year of 2022. However, 2023 has proven to investors that flaws with the ETF exist and can seriously eat into investor returns when compared to those of the S&P 500.

I believe SPYI is a great complement to this ETF. With the same benchmark index, SPYI has been able to capture over 96% of the S&P 500’s total return year-to-date while delivering a consistent monthly distribution to their investors.

Together, they are an income-focused investor’s dream. Consistent monthly income, upside potential, tax efficiency, and lower volatility during times of uncertainty.

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