Trending
In the fast-growing world of actively managed exchange traded funds, J.P. Morgan Asset Management (JPAM) is one of the leaders.
Enviable branding and a large distribution have aided JPAM’s ascent in the ETF space. Despite a relatively late start, the firm is now the sixth-largest U.S. ETF issuer as measured by assets under management. As of Oct. 21, that tally stood at an impressive $175.79 billion, an advantage of more than $11 billion over the nearest rival.
The JPMorgan Equity Premium Income ETF (JEPI) accounts for $36.77 billion of JPAM’s ETF assets and like other success stories among active ETFs, JEPI is the descendant of a popular active mutual fund. In this case, the JPMorgan Equity Premium Income Fund.
That’s not the only reason for JEPI’s success. In fact, it’s probably not the primary reason. Rather, JEPI’s income proposition – one driven by covered calls – is a driving force behind its popularity. Even when bond yields soared in 2022 and 2023, JEPI’s yield remained appealing. Today, it’s a still enticing 8%.
JEPI More Than Just Income
Obviously, a 30-day SEC yield of 8% will catch a lot of investors’ eyes and with some speculation that it could be awhile before the Federal Reserve again lowers interest rates, an ETF like JEPI could be attractive relative to bonds. The JPAM ETF could also be appealing to market participants concerned about a potential uptick in volatility.
“This strategy’s options income offsets some losses incurred during drawdowns, and higher implied volatility during these periods often translates to higher call premiums and higher income,” notes Morningstar analyst Lan Anh Tran. “The stock portfolio is less sensitive to the market’s movements, which lessens the sting. It beat the index significantly during the late-2018 selloff and the 2022 market meltdown.”
Thing is with covered call ETFs, including JEPI, is that end users aren’t getting a free lunch. There’s a trade-off when it comes to accessing the benefits of downside protection, elevated income and lower volatility: capped upside.
Said another way, because it sells options, JEPI won’t produce returns on par with the parent index, in this case the S&P 500. Over the past three years, JEPI returned an admirable 28.1% and was in fact less volatile than the S&P 500, but the benchmark domestic equity gauge beat the ETF by 900 basis points.
Speaking of Performance…
JEPI’s three-year run mentioned above includes dividends, but even in that case, the ETF did easily trounce the S&P 500 Low Volatility Index over that period. That’s impressive, particularly when considering JEPI lobs off more income than many basic equity-based “low vol” strategies.
Point is JEPI does its job, but investors shouldn’t expect equity benchmark-matching returns with this ETF.
“Nonetheless, it has outperformed the index during major downturns. The fund beat the S&P 500 by 5.49 and 14.23 percentage points during 2018’s fourth-quarter selloff and the 2022 market meltdown, respectively,” adds Tran. “On top of the buffer provided by its call premiums, the fund’s defensive stock portfolio also cushioned large drops. For instance, the stock sleeve outpaced the index by 10.88 percentage points in 2022, an impressive feat even after accounting for its lower exposure to the market’s risk.”