The first half of 2023 is in the books, and it has been a pretty good year for the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI). The ETF, which features a dividend yield of just over 10%, has taken in $10 billion in net inflows (as of late June), more than all but two other ETFs, the massive Vanguard S&P 500 ETF and the iShares 20+ Year Treasury Bond ETF, which is quite an achievement given the ubiquity of these passive ETFs.
Not only that, but the inflows have increased JEPI’s assets under management to $28 billion, meaning that it has surpassed the JPMorgan UltraShort Income ETF as the world’s largest actively-managed ETF.
The speed of JEPI’s ascent up the ETF leaderboards has been remarkable, given that the ETF only launched in May 2020.
Now, let’s take a look at what JEPI is, what’s driving its surging popularity, and how it can fit into your portfolio.
Why is JEPI So Popular?
What’s behind JEPI’s rapid climb up the ETF leaderboards? Look no further than its double-digit dividend yield, which is currently just over 10%, as mentioned earlier. In a world where retirees and other income-oriented investors are looking to generate more income, this double-digit yield is appealing. This yield trounces that of the broader market, where the average yield for the S&P 500 is just 1.5%.
It’s also significantly higher than the risk-free yield of 3.94% that investors can get from 10-year Treasury notes. Additionally, it’s far higher than the rate of inflation, which has cooled since its peak but still came in at 4% for May. Not only does JEPI have an eye-popping yield, but it pays its dividend on a monthly basis, which makes it even more attractive to investors looking for a reliable and frequent stream of passive income.
How Does JEPI Invest?
According to fund sponsor JPMorgan, JEPI “generates income through a combination of selling options and investing in large-cap U.S. stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends.” Through this strategy, JEPI also attempts to “deliver a significant portion of the returns” of the S&P 500 with less volatility.
Diversified Blue-Chip Holdings
JEPI currently holds 118 positions. The fund is extremely diversified in that its top 10 holdings account for just 17.5% of assets. This reduces the risk of having too much exposure to just a handful of stocks. JEPI’s top holding, Adobe, accounts for under 2% of assets.
Below is an overview of JEPI’s top 10 holdings using TipRanks’ holdings tool.
JEPI’s top holdings are a mix of high-flying technology stocks like Adobe, Amazon, and Microsoft paired with reliable, long-time dividend payers like Pepsico and Hershey. What they have in common is that they are all large-cap U.S. stocks, and most investors would consider many of them to be blue-chip names.
The inclusion of growth stocks like Adobe and Amazon may seem unusual as they aren’t dividend stocks, but because JEPI is selling covered calls (an options strategy) to generate income, not every stock it holds is necessarily a dividend stock.
Is JEPI a Buy, According to Analysts?
Turning to Wall Street, JEPI has a Moderate Buy consensus rating, as 68.32% of analyst ratings are Buys, 29.01% are Holds, and 2.67% are Sells. At $60.52, the average JEPI stock price target implies ~11% upside potential.
Taking a Look at Its Performance
JEPI hasn’t been around for long, so we can’t track its performance over the course of a decade or more. However, it has now been around for three years, and as of the end of May, it had a respectable annualized total return of 11.6% over the past three years.
Evaluating the Potential Trade-Offs
One factor that investors should take into account when considering an investment in JEPI is the potential trade-off that comes with its large dividend yield. Many analysts and observers have noted that by selling covered calls, JEPI runs the risk of leaving upside on the table as the market rises.
You can see this concern in effect this year — while JEPI’s total return of 5.6% year-to-date isn’t bad, it significantly lags the S&P 500, which is up 16.5% over the same time frame. The Nasdaq is up even more, with a gain of 33% so far in 2023.
On the other hand, recall that part of JEPI’s strategy is to reduce volatility. To JEPI’s credit, during last year’s more turbulent market, its total return of -3.5% was significantly better than those of the S&P 500 and Nasdaq, which were down 19.6% and 33.5%, respectively, for the year. This relatively strong showing in 2022 seems to validate JEPI’s strategy as a way to reduce volatility and add downside protection.
So over the past two years, JEPI has outperformed the market during bad times and lagged the market during good times while still producing double-digit annualized returns and paying its investors a monthly dividend, which pretty much sums up its value proposition for investors.
For investors who understand this dynamic and are okay with the idea of likely sacrificing some long-term capital appreciation in exchange for some stability and downside protection (plus a monthly dividend), JEPI appears to be a suitable ETF to own. Also, given JEPI’s rapid rise to prominence, there are apparently plenty of investors out there who are happy to take this approach.
In a recent discussion with the Financial Times, JPMorgan’s global head of ETF solutions, Byron Lake, explained that “We are having fewer conversations around [returns] relative to benchmark and more conversations around what clients are trying to achieve,” which could be “a good quality of life in retirement.”
Over the long run, it has historically paid to have exposure to the market’s long-term upside, so while I wouldn’t make JEPI my largest holding (or only holding, for that matter), I do like the idea of utilizing it as one component of a well-balanced portfolio that will deliver monthly income with an above-average yield as well as returns that are less correlated with the broader market.
