There’s an exchange-traded fund for just about any purpose you can imagine. Some ETFs concentrate solely on producing the largest possible share-price gains, choosing stocks entirely based on their future prospects and not at all on whether they pay current income in the form of dividends to shareholders. Other ETFs seek out certain types of stocks, specializing by using factors such as industry, company size, or location.
For investors whose most important consideration is income, the JPMorgan Equity Premium Income ETF (JEPI +0.09%) looks highly appealing. Its dividend yields are consistently higher than what you’ll find from just about any other type of ETF. It’s also actively managed, so there are professional stock pickers trying to separate the most successful prospects from the rest.
But to get those high yields, the JEPI ETF has to give something up in return. And unfortunately, what it trades for that income can have a downward impact on the fund’s total returns. In this second article of a three-part series on JPMorgan Equity Premium Income ETF for the Voyager Portfolio, you’ll find out exactly how this fund’s managers generate all that income and what it means for your total returns as a shareholder.
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Strong relative performance in weak markets… but weaker performance in strong markets
JPMorgan Equity Premium Income uses an investing methodology that involves derivatives that mimic a covered call strategy. When you write calls against a stock market index, you’re essentially making a bet that the market won’t rise above the level you determine when you write the call. If the index stays at or below the level you specify, then the option will expire worthless, and you’ll get to keep the entire premium payment that you received when you first did the transaction.
However, if the market does rise above that predetermined level, then things don’t work out as well. For individual stock options, typically you’ll be forced to sell your shares at the level you chose, missing out on further gains. With cash-settled stock index options, you might instead have to pay out cash to your counterparty, reducing or completely offsetting the premium income you received and even possibly leaving you with a net loss.
To see how this works in actual practice, take two examples. In 2022, the stock market was extremely weak, with the S&P 500 falling about 19%. During that period, it’s likely that the premium income that the JPMorgan ETF received stayed entirely with the fund. The total return of -3.5% for the ETF certainly wasn’t great, but it was a much smaller loss than the overall market suffered.
Conversely, in 2023, the market rebounded sharply, with the S&P rising about 26%. Because stocks were moving higher so quickly, it’s likely that the covered-call-like strategy that the JPMorgan ETF used resulted in some derivative-related losses that ate into some of the gains in the ETF’s stock portfolio. As a result, the JEPI ETF’s total return for the year was around 10%, underperforming by 16 percentage points.
Over longer periods, missing out on those gains can be costly. JPMorgan Equity Premium Income’s average five-year return amounts to 9.8% per year. That’s respectable, but it’s well short of the 13.4% per year that you would have made in a vanilla S&P 500 index fund. And bear in mind that the 9.8% return includes the dividend distributions you receive from the JEPI ETF. With so much income paid out, the share price of the ETF hasn’t risen nearly as much as what you see in an index ETF.
JPMorgan Equity Premium Income ETF
Today’s Change
(0.09%) $0.05
Current Price
$57.23
Key Data Points
Day’s Range
$57.09 – $57.68
52wk Range
$49.94 – $59.90
Volume
3.5M
Does JEPI make sense for you?
Just because you’re giving something up doesn’t mean that you’re making a bad decision. It all depends on what your particular needs are. In the third and final article on the JEPI ETF for the Voyager Portfolio, you’ll find out about one last factor to consider when making an investing decision.