JPMorgan Says HELO to Advisors Seeking Downside Protection

JPMorgan has a pair of actively managed, options-enhanced equity ETF strategies with a combined $35 billion in assets. Did it just launch what will be a third successful one? On Friday, the JPMorgan Hedged Equity Laddered Overlay ETF (HELO) began trading. According to JPMorgan, HELO has the same philosophy as a strong performing JPMorgan mutual fund and is run by the same management. This team also is behind two popular active ETFs. 

JEPI and JEPQ Are Top Active Equity ETFs  

The JPMorgan Equity Premium Income ETF (JEPI) is the largest active equity ETF trading in the U.S. Despite launching only in May 2020, the $29 billion fund pulled in $16 billion in the past year. Meanwhile, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) gathered $4.9 billion and is now a $5.4 billion fund. JEPQ began trading only in May 2022. 

During the VettaFi Equity symposium in September, we asked, “Which investment style would you consider investing in, in actively managed ETFs?” A strong 52% of respondents chose U.S. large-caps, while a healthy 46% and 32%, respectively, selected international equities and fixed income.   

“We keep hearing from investors that they want to see more active ETFs,” explained Bryon Lake, global head of ETF solutions at JPMorgan Asset Management. “We’re incredibly proud of our active management capabilities. Delivering them through the ETF wrapper is one of our top priorities.” 

Covered Call ETFs Offer Enhanced Income 

Both JEPI and JEPQ are covered call ETFs with 12-month yields of 11% and 13%, respectively. They actively select individual stocks to own based on fundamental research. Management then sells out-of-the-money index call options to generate monthly income. JEPI’s universe is the S&P 500 Index, while JEPQ’s is the growth-oriented Nasdaq-100 Index. 

JPMorgan’s success has led other large firms to offer or plan their own actively managed covered call ETFs. For example, the BlackRock Advantage Large Cap Income ETF (BALI) began trading last week. Meanwhile, Goldman Sachs has its own ETF likely to launch soon. Amplify, Global X, NEOS, and KraneShares also have established covered call products.  

JEPI and JEPQ are managed by the same team running HELO. Hamilton Reiner is the lead manager and a prominent advocate for using options. He recently spoke at the VettaFi Equity Symposium and has three decades of equity and options experience including 14 years at JPMorgan. Co-manager Raffaele Zingone works with JPMorgan equity analysts to make the equity selections. These strategies provide broad market exposure but own a subset of the investable universe. 

HELO Has a Mutual Fund Cousin 

Meanwhile, we believe HELO is based on the approach of a well-established active mutual fund. This gives us insight into what it likely will own and how it is likely to perform. The JPMorgan Hedged Equity A (JHQAX) is a retail class of a $16 billion mutual fund portfolio with nearly a decade of performance. There is approximately $30 billion in assets across the mutual fund suite.  

HELO is not a new share class of JHQAX but is a stand-alone separate offering and could indeed perform differently. Management for the ETF has discretion on the timing on how they roll the options to implement the strategy. 

“Clients should determine the best way to consume a product,” explained Reiner in an exclusive interview. “We have a long record of running a hedged equity strategy in the mutual fund space but are excited to reach a broader audience through the ETF wrapper.” 

JHQAX has a five-star rating in Morningstar’s options trading fund category. According to Morningstar research, “The managers start with an equity portfolio that closely mimics the S&P 500 but with small tilts toward stocks they believe are attractively priced. To temper downside risk, the team purchases put options with strike prices 5% below the S&P 500’s market value at the start of each quarter. To offset part of the cost of the put option, the team first sells put options 20% out of the money. This structure should generally protect the fund from quarterly losses between 5% and 20%.” 

Downside Protection for Those More Risk Averse 

This intended level of quarterly downside protection sounds like the Innovator Defined Wealth Shield ETF (BALT), which launched in 2021. However, BALT owns options on the S&P 500 Index not individual stocks. As such it will perform differently than HELO. 

Morningstar further wrote about JHQAX “as designed, the options overlay tempers upside returns in exchange for downside protection, limiting drawdowns to 5.33% for the second quarter of 2022 and 4.9% during the first quarter of 2020. This translated to nearly 11 and 15 percentage points in excess returns over the S&P 500 in these respective periods.” 

HELO Is a Lower-Risk Alternative

Let’s contrast JEPI with JHQAX using some risk metrics. The income-focused JEPI had a recent beta of 0.62 and a three-year standard deviation of 12, which has contributed to its risk-adjusted Sharpe ratio of 0.75. JHQAX had a beta of 0.45 and a standard deviation of 8.7. While its Sharpe ratio 0.70 is lower, the more risk-averse investors still find it appealing to stay invested in the market. 

JHQAX recently held 169 positions, and in second quarter 2023 commentary, noted the absence of a position in Disney and an overweight position in Texas Instruments, relative to its benchmark, as impacting performance. 

Relative to JHQAX, HELO is a lower-cost alternative and comes with the usual ease of use benefits of an ETF. HELO charges a 0.50% expense ratio, less than the 0.83% fee for the mutual fund. We think HELO is going to quickly achieve scale. JPMorgan has had success in educating investors about the benefits of options-based equity ETFs. In addition, they have a strong brand as a provider of active ETFs. This is a style of investing likely to gain further traction. 

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