A total return exchange traded fund strategy that generates income using option premiums can provide investors an alternative way to diversify away from traditional equity and fixed income exposure.
In the recent webcast, Income is the Outcome: Why Active Income Strategies Work, Hamilton Reiner, Managing Director, Portfolio Manager, J.P. Morgan Asset Management; and Jordan Jackson, Vice President, Global Market Strategist, J.P. Morgan Asset Management, warned that while interest rates are poised to rise, income-minded investor still need to maintain their current yield generation. However, alternative options in the income world are not exactly plentiful, and equity overweights can be outright dangerous as stocks continue to push toward record highs.
The Federal Reserve is more likely to hike interest rates as economic conditions improve. The FOMC has forecasted that the change in real GDP will be 7.0% for 2021 and 3.3% in 2022, compared to a 1.8% long-term expansion rate. The unemployment rate will be 4.5% in 2021 and 3.8% in 2022, compared to a 4.0% long-term rate. In addition, PCE Inflation will be 3.4% for 2021 and 2.1% in 2022, compared to a 2.0% long-term target.
The strategists also warned of the shortcomings of a traditional stock and bond portfolio mix. For example, while the S&P 500 and Barclays Aggregate Bond Index have exhibited negative correlations during more complacent market conditions, the stock and bond benchmarks have shown positive correlations during most stressful environments, like the financial crisis, U.S. presidential elections, and the most recent Covid-19 pandemic.
Furthermore, the strategists argued that the 60/40 traditional portfolio mix has never been more expensive based on the earnings yield of the S&P 500 and the yield-to-worst on the Bloomberg Barclays U.S. Aggregate. The U.S. equity market earnings are elevated with markets at record highs, while bond markets rates are depressed in a lower-for-longer yield environment.
Consequently, as investors look for ways to enhance yield generation without tacking on more risk in this type of market environment, the strategists argued that balancing income and equity exposures are essential to portfolio construction today.
This is where the JPMorgan Equity Premium Income ETF (JEPI) could come in handy. JEPI provides diverse opportunities to earn income from both dividends and options premiums. The JPMorgan Equity Premium Income ETF targets a significant portion of S&P 500 returns with less volatility, seeking annualized income distributed monthly. The fund leverages an experienced equity management team comprising more than 50 years of combined experience and headed by 32-year industry veteran Hamilton Reiner as the lead portfolio manager.
The JPMorgan Equity Premium Income ETF is a defensive equity portfolio with an 8-year track record, leveraging a time-tested, 30+ year investment philosophy and process to solve for a lower volatility experience. The options designed to provide consistent stream of income through disciplined SPX options strategy or 1 month out of the money call options sold on a rolling weekly basis. Investors accrue income daily with income paid out monthly.
JEPI seeks to provide significant income for income models, tries to deliver a consistent stream of monthly income from dividends and options premiums, and acts as a complement or substitute to dividend yield strategies.
The ETF is for investors wanting more equity exposure but in a lower risk manner. It seeks to help clients meet income needs, rather than selling equities at unfavorable times. Additionally, the strategy can be a complement of or substitute for minimum volatility strategies, with a three-pronged approach to total returns.
Additionally, the equity premium income can act as a credit replacement. The strategy is utilized for balancing income with prospects for capital appreciation. It can reduce exposure to credit risk, duration risk, or interest rate risk. Lastly, investors can use the fund to complement or substitute high yield, preferred equities, or emerging market debt with the ability to provide higher yield per unit of risk.
Financial advisors who are interested in learning more about income strategies can watch the webcast here on demand.