Today’s income investors face a tough choice – hold cash and core bonds paying low rates or extend into higher-yielding markets with more risk and less liquidity. The actively managed JPMorgan Equity Premium Income ETF (JEPI) seeks to resolve the dilemma by pursuing consistent monthly income and appreciation potential, with lower volatility than the U.S. stock market.
Income remains in high demand, but short supply
JEPI comes along at a time when income has rarely been so scarce. The Fed is keeping rates near zero, with no hikes in sight. Traditional income sources are barely outyielding inflation, and real returns may quickly turn negative as rates and CPI rise. On the equity side, many companies are cutting or suspending dividends in response to COVID-19 belt tightening.
At the same time, investors continue to demand yield not only for the income stream, but also as a way to boost returns and buffer risks in an uncertain environment. As the pandemic wears on everything from economic growth to unemployment to corporate profits, investors will need to get more innovative in meeting income needs without exceeding risk tolerances.
A conservative equity ETF seeking income as the outcome
JEPI brings the same people, process and philosophy from an established mutual fund to a low-cost, liquid ETF offering daily transparency and tax efficiency. The strategy combines equities with options to strike a balance among yield, capital growth and risk. 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.
Here’s how it works: We use fundamental bottom-up research to build a higher-quality, lower-beta portfolio of U.S. large cap equities with less volatile earnings and share prices. We then sell index options against that long-only portfolio and use the premiums to generate income. The result is a conservative equity income strategy designed to reduce downside exposure by forgoing some upside participation.
With JEPI, investors receive:
- Fully active, broadly diversified solution: Leverages 26 research analysts and an over 30-year proprietary process to find attractive stocks across sectors.
- Innovative income: Avoids the duration risks of higher-yielding bonds and the quality risks of higher-yielding stocks.
- Unique options strategy: Sells call options every week to adapt to changing market conditions. When volatility spikes, for example, JEPI has the potential to provide higher income when investors most need the cushion against fluctuating prices.
- 100% payouts: Distributes all income from dividends and options premiums, which are treated as coupons rather than gains so that capital isn’t returned to shareholders.
JPMorgan Equity Premium Income ETF at a glance
|Strategy||Combines defensive U.S. large cap equity portfolio with options overlay to pursue income and growth|
Four ways to build stronger portfolios with JEPI
- Add to income portfolios to pursue consistent, attractive yields regardless of what happens with interest rates or equity dividends.
- Replace high yield bonds with a strategy offering greater liquidity, no duration risk and higher income potential in exchange for more beta.
- Deploy excess cash for investors looking to ease back into stocks with about one-third less volatility.
- De-risk equity portfolios by locking in gains from dividend strategies and reinvesting the proceeds in our more conservative alternative.
With rates low and volatility high, now’s the time to be creative and active in your search for yield. Discover how JEPI can help you solve for income without sacrificing quality, liquidity or long-term growth potential.
Originally published by J.P. Morgan Asset Management, 8/26/20
JEPI RISK SUMMARY: The price of equity securities may fluctuate rapidly or unpredictably due to factors affecting individual companies, as well as changes in economic or political conditions. These price movements may result in loss of your investment.
Investments in Equity-Linked Notes (ELNs) are subject to liquidity risk, which may make ELNs difficult to sell and value. Lack of liquidity may also cause the value of the ELN to decline. Since ELNs are in note form, they are subject to certain debt securities risks, such as credit or counterparty risk. Should the prices of the underlying instruments move in an unexpected manner, the Fund may not achieve the anticipated benefits of an investment in an ELN, and may realize losses, which could be significant and could include the Fund’s entire principal investment.