ETF Trends CEO Tom Lydon discussed the JPMorgan Equity Premium Income ETF (JEPI) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
JEPI is an actively managed fund that generates income by selling options on U.S. large cap stocks. The fund invests in S&P 500 stocks that exhibit low-volatility and value characteristics and sells options on those stocks to generate additional income. Ultimately any actively managed fund is a bet on the manager’s ability to outperform the market. JEPI offers a hedge-fund-like strategy in an ETF wrapper, and investors and advisers should consider whether JEPI is suitable for their objectives. It is quite reasonably priced for what it offers.
JEPI provides an income solution for today’s market environment. Income investors face a tough choice: hold cash and core bonds paying low rates or reach out to higher-yielding markets with more risk and less liquidity. JEPI helps generate a steady monthly income stream in this low-for-longer yield environment.
Yields on benchmark 10-year Treasury notes recently dipped down to 1.25%, compared to a high of 1.8% during the height of the inflation fear selling. Yields, which fall when bond prices rise, have been trending lower for months. With a rise in risk-off hedging, yields have been falling as investors re-evaluate their previously more optimistic economic forecasts.
There are reduced expectations for monetary stimulus and government spending. Plus, a run of underwhelming economic data. And there’s also the spread of the Delta variant of Covid-19.
The Treasury rally has wrong-footed many on Wall Street, forcing some investors to buy bonds to close out wagers on rising yields. That, in turn, has forced yields to fall even further.
What Is Equity Premium Income?
The Equity Premium Income Fund provides diverse opportunities to earn income from both dividends and options premiums. A unique feature of this fund is the monthly payout of all income earned — so what you earn is what you keep. The result is consistent monthly income even in volatile market environments.
JEPI 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 fund tries to generate income through a combination of selling options and investing in U.S. large cap stocks, providing investors with a monthly income stream from associated option premiums and stock dividends. JEPI managers try to construct a diversified, low volatility equity portfolio through a proprietary research process designed to identify over- and under-valued stocks with attractive risk-to-return characteristics.
This yield-generating strategy may help fixed-income investors diversify their total return portfolio with lower equity risk. The ETF acts as an income diversifier given its ability to distribute income without exposure to the duration or interest risk relative to other income-yielding products. By selling call options on JEPI’s managed volatility, diversified large-cap stock portfolio, JEPI seeks to deliver monthly income with less volatility than the broader market.
Listen to the full podcast episode on the JEPI:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.