Is JEPI a good investment in 2023? – dividend & long term goals

Is JEPI a good investment

One of the best-known income ETFs on the market right now is the JPMorgan Equity Premium Income ETF (JEPI), and for a good reason. JEPI has a double-digit dividend, engages in a diverse portfolio of lower-risk stocks, and has experienced little capital growth since its founding. With many advantages and few notable downsides, JEPI is a solid product ideal for retirees and income seekers.

JEPI distributes covered call options via ELNs (Equity Linked Notes) on a group of low-volatility stocks chosen from the S&P 500 Index (the 500 largest U.S. corporations) to generate revenue. Launched in the middle of 2020, this fund has collected assets worth more than $3.5 billion. It possesses a 0.35% expense ratio.

Thus, a covered call ETF for the S&P 500 Index created to reduce instability and produce profit is called JEPI. However, is it a good investment? Let us review it in this article.

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How does JEPI work?

Is JEPI a good investment

JEPI chooses equities based on ESG standards, valuation standards (think dividend-paying value stocks), and high stability. The fund’s primary mission is to outperform the S&P 500 benchmark index while maintaining lower volatility and higher income. The fund would be excellent for a retiree if it could accomplish that goal, which it still needs to do. The dividends paid by the stocks that JEPI owns contribute to its high yield.

Since the ETF is actively managed, it aims to “provide a major share of the returns associated with the S&P 500 Index in addition to monthly income,” as was previously said. On the equity side, this comprises a bottom-up basic research methodology that uses “proprietary risk-adjusted stock ratings” based on their “relative worth” to filter large-cap U.S. equities. This method is a bit of a “black box,” and JEPI’s brochure doesn’t go into great depth about it.

JEPI may spend up to 20% of its monthly revenue in exchange-linked notes, or ELNs. These are fixed-income securities that a creditor has issued and guarantee a return based on a reference asset. JEPI owns ELNs that give it access to call options on the S&P 500 index that are out-of-the-money.

JEPI does not own all the equities necessary to write call options on the S&P 500 index itself, in contrast to other call option ETFs. Its actively managed inventory is unique. As a result, it needs to be exposed through different tools, in this example, an ELN.

Is JEPI a good investment in 2023?

We would be right if JEPI made us think of DIVO. The funds’ strategy of choosing large-cap dividend equities from the S&P 500 and selling call options makes them remarkably identical. However, there are a few key areas where they diverge:

  • JEPI has 95 holdings, while DIVO only has 23, making it more diversified.
  • JEPI is nearly six times more prevalent than DIVO in terms of AUM.
  • In contrast to DIVO, JEPI charges a reduced fee of 0.35 per cent.
  • They own different equities because JEPI has a higher weighting on value and investment variables than DIVO on size and profitability.
  • JEPI considers ESG requirements for inclusion, whereas DIVO seems not to.

In terms of overall performance, JEPI and DIVO have been quite competitive. However, JEPI may have achieved its goal more consistently, with higher returns at lower risks. As a result, in the short time these two funds have existed, JEPI has produced slightly greater overall and risk-adjusted returns than DIVO. Both have still underperformed the entire market.

Is JEPI a good investment, then? Most likely not. As with DIVO, the goal is to put together a low-volatility portfolio of stocks that JEPI seeks to keep. But over the long run, we still anticipate stock selection to outperform the market. We could also pay less money and purchase a low-volatility or value fund.

These call option funds should only be used by investors who depend on and use their stable income from dividends and option premiums. It only makes sense to purchase JEPI if all we intend to do is reinvest the fund’s payouts. Especially for anyone who will have to pay taxes on them if they are held in a taxable account. 

We can directly target ESG, value, or dividends while spending less on fees. If we believe that the S&P 500 will rise, invest in a cheap index fund, such as Vanguard’s VOO, and stop. Remember that covered calls restrict an increase in the index’s value.

Is JEPI an excellent long term investment?

Is JEPI a good investment

JEPI is well-liked. The ETF presently manages about $18 billion in assets, with a cost ratio of 0.35%, which is considered moderate. Compared to other income-oriented products, the ETF now has a 12-month dividend yield of 11.29%, which would be fairly high.

What has the ETF’s past performance been like? Experts backtested the fund against the S&P 500 and a well-balanced 60/40 portfolio of American stocks and bonds to find out. Note that this approach is too brief to yield conclusive results because JEPI began operations in May 2020.

The research shows that while JEPI lagged the S & P 500 in 2021, it beat it significantly in 2022. Notably, in both years, it outperformed the 60/40 portfolio. Additionally, it did so with less turbulence and downturns.

JEPI performed significantly worse in 2020 than in 2019, when it nearly matched the 60/40 portfolio’s returns. The COVID-19 crash is the root cause. The call option overlay for JEPI could have been a more effective hedge, unlike the 60/40, which was protected by its bond allocations due to Fed rate decreases.

JEPI decreased almost as much as a standard S&P 500 index ETF. The lesson learned is that covered calls are a revenue solution and do not adequately manage risk. They should not be relied upon as crash protection. Bonds remain necessary.

For investors worried about increasing rates and seeking a comparable level of volatility, ETFs like JEPI works best as an addition to a conventional 60/40 strategy. Holding JEPI alone may reduce volatility but won’t provide crash protection. Think of combining it with a Treasury ETF, for example.

Is JEPI good for retirees?

This fund can be particularly appealing to retirees and other income investors. Investors should be aware of this yield-focused strategy’s drawbacks. It has limited potential for gain while the overall market is rising. Nevertheless, for some investors, JEPI might be a wise choice.

JEPI was formerly a low-profile, high-yielder, but that is no longer the case. Just two years ago, the fund had assets totalling less than $200 million; today, it is a $17 billion giant. Of the 3,000 U.S.-listed ETFs, it had the seventh-greatest total revenue in 2022 (slightly under $13 billion)!

In essence, JEPI is a covered call ETF. It’s unusual because it purchases equity-linked notes rather than selling call options on specific equities or indices (ELNs). These are securities that combine an index and a written covered call. Although there is a structural difference, it essentially functions like a covered call ETF.

The defensive, low-volatility stocks that make up the core portfolio of JEPI were chosen through a bottom-up, basic research process. Written out-of-the-money call suggestions based on the S&P 500 make up the ELNs.

The increased market volatility of the previous year raised the price of options contracts. This is one of the reasons the yield has grown to a recent high of over 14%. Higher premiums result in more revenue for the fund, which increases JEPI’s returns.

JEPI has emerged as one of our preferred high-yield ETFs. The 14% yield (typically between 8 and 10%) will only last for a while. But in its comparatively short history, it has 

Outperformed the S&P 500 while carrying around 30% less risk. That is suitable for practically any retirement portfolio!

Therefore, these funds would be suitable for at least some of our retirement portfolio. Although adding these funds wisely to an otherwise diverse portfolio might give anyone a good income boost, We don’t necessarily want to overweight them or make them the centre of our retirement income scheme. Due to their low correlations with other traditional asset types, adding these ETFs could lower portfolio risk while increasing yield. 

Is JEPI a qualified dividend?

JEPI delivers $0.61 per month based on its most recent dividend payment. That works out to almost $7.30 each year, a staggering dividend yield of 13.3%. Not all monthly dividend payments, however, are thus high. JEPI has distributed $6.26 per share during the past year, or just over $0.50 each month. With that, the dividend rate is 11.4%. Even though it isn’t nearly as high as the yield when the most recent distribution is annualized, a result of 11% or more on dividends is still quite favorable.

Investors must accept fluctuations in JEPI’s net dividend payments due to the ups and downs in the earnings from call writing. There will always be a few months that are better than others.

Dividends have generally been increasing. JEPI distributed $3.23 in dividends per share in 2020 and $4.16 in dividends overall in 2021. JEPI will pay out a little more than $6.00 this year, a significant increase from 2021. This is driven by higher market volatility since, on average, it enables call sellers to collect more significant premiums.

Option premiums will likely be lower once again when markets stabilize, and volatility decreases. This could result in fewer dividend payments. Although the payout trend has increased, investors may eventually have to accept smaller dividend payouts. Even with a dividend cut, a dividend yield in the high single digits would still be possible if the payout was reduced to $4 or $5 per share. The prospect of a dividend cut exists but is not at all assured.

Is JEPI a good ETF?

The JPMorgan Equity Premium Income ETF is an appealing option for low-income investors seeking a low-volatility investment. JEPI offers a sizable income return paid out monthly and will undoubtedly outperform during market falls (including the one we are currently experiencing). This is due to its low beta.

However, due to the structure of the stock portfolio and the call writing that the ETF engages in, the upside in a favorable situation is more constrained compared to an ETF like QQQ. As a result, JEPI is only suitable for some.

.With a 12% dividend paid every month, JEPI was the eighth most famous ETF in 2022. The investors’ interest has exploded due to this. JEPI has produced average annual returns of 13.4% and yields of 9.3% since its debut, but with 37% less volatility than the S&P and 50% lower peak drops.

Conclusion

With sell indications from both the short- and long-term trend lines, the JPMorgan Equity Premium Income ETF has a more negative outlook for the company. Additionally, the connection between the two signals indicates a general sell signal, where the long-term average is higher than the short-term average. The lines at $55.05 and $55.17 will offer some support during upward recovery. Equity Premium Income exhibits several encouraging signs, but they are insufficient to qualify it as a buy option. It should be regarded as a hold option (hold or accumulate) while expecting further growth at the current level. Since the last review, experts have downgraded their analytical conclusion for this ETF from a buy to a keep or accumulate option. This was due to a few minor things that could have been improved in the technical outlook.

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