JEPI: 2 Better Long-Term Big Yields

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JEPI: How overmuch money are you consenting to springiness up?

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At first look, nan JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) appears to beryllium an income investor's dream. It offers a very precocious existent output (11.8%, paid monthly) and it has importantly little volatility than nan banal marketplace (as measured by nan S&P 500 (SPY)). However, a look nether nan hood reveals JEPI is not precisely what a batch of investors deliberation it is. In fact, its output is positioned to diminution significantly, and it will almost surely underperform nan S&P 500 dramatically complete nan agelong term. In this report, we reappraisal nan JEPI details, stock our sentiment connected who should (and who should NOT) see investing, and past connection 2 acold superior semipermanent big-yield finance opportunities.

JEPI Overview:


JP Morgan

Per nan fund's summary prospectus, JEPI is:

"designed to supply investors pinch capacity that captures a mostly of nan returns associated pinch nan S&P 500 Index, while exposing investors to little volatility than nan S&P 500 Index and besides providing incremental income."

That sounds for illustration a bully thing, and nan money has precocious delivered pinch flying colors arsenic you tin spot successful nan pursuing charts (i.e. it's precocious beaten nan S&P 500 and delivers a dramatically bigger dividend yield).

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For a small much color, JEPI invests astatine slightest 80% of assets successful stocks (mainly selected from nan S&P 500) while besides investing successful equity-linked notes ("ELNs") to employment a covered telephone action strategy which enhances income and lowers volatility (more connected covered calls later successful this report).

Further, JEPI uses an progressive banal action process relying heavy connected JP Morgan's investigation to prime charismatic individual stocks (typically 90 to 120 positions) mostly from nan S&P 500. Further still, nan money complete weights (versus nan S&P 500) much protect sectors of nan economy, specified arsenic Utilities, Staples and Healthcare. Its largest holdings includes companies you apt cognize and trust, specified arsenic UnitedHealth Group (UNH), Coca-Cola (KO) and Honeywell (HON).

Overall, JEPI's money head expects nan money to person astir 35% little value volatility than nan S&P 500 (something that tin beryllium very charismatic to income-focused investors). Again, this is accomplished done banal action and nan covered telephone strategy employed by nan fund.

JEPI's Covered Call Strategy:

JEPI pursues its covered telephone options strategy by purchasing equity-linked notes (ELNs) which "combine equity vulnerability pinch telephone options." JEPI uses ELNs (instead of penning its ain covered calls) because action premium income is not considered bona fide income (it's considered a summation and/or return of capital), whereas ELNs count arsenic income thereby allowing nan money to nutrient its very precocious "dividend" yield. Other covered telephone strategy costs (that really usage covered calls alternatively of ELNs) mostly study overmuch little yields, moreover though nan income is akin (although taxed differently-more connected this later).

If you don't know, a covered telephone strategy is fundamentally nan astir blimpish options trading strategy whereby you cod upfront premium income by trading an out-of-the-money telephone action connected shares you already own. For example, if Apple trades astatine $150, you whitethorn waste a covered telephone action pinch a onslaught value of $160 thereby giving personification other nan action to telephone Apple shares distant from you astatine $160 moreover if nan stock value rises to $170 (thereby giving you immoderate stock value appreciation potential, but capping that upside summation imaginable successful speech for nan upfront action premium income you received). Essentially, nan covered telephone strategy limits your upside imaginable successful speech for upfront premium income. The strategy besides helps successful down markets (like 2022) because your relationship worth won't autumn arsenic acold because you will support collecting that upfront action premium income (as agelong arsenic you support penning caller telephone options).

Volatility Matters:

One of nan superb things astir JEPI is that it makes much income erstwhile nan markets are volatile because options premium income goes up erstwhile volatility increases (like it did successful 2022) because group are frightened and consenting to salary much to compensate for nan accrued uncertainty protection. To put that successful perspective, 2022 was a really bully income twelvemonth for JEPI because volatility was precocious (see JEPI's dividend output floor plan earlier), but successful a much emblematic twelvemonth nan money managers expect nan dividend to beryllium successful nan precocious azygous digits-not nan 11.8% output we spot currently.

So again, nan superb point astir JEPI is that it offered a debased volatility strategy (the money typically has 35% little value volatility than nan S&P 500) astatine a clip erstwhile marketplace volatility was up (i.e. 2022) and it besides offered a bigger-than-normal dividend output astatine precisely nan aforesaid time. For galore investors, this precisely meets their needs: Less volatility and much income--especially erstwhile nan marketplace goes down!

JEPI's Long-Term Returns Will Lag:

JEPI gives distant important semipermanent return imaginable (as compared to nan S&P 500) by employing an options strategy that increases income and reduces volatility. In a down market, this is awesome (because you are avoiding immoderate of nan value declines). But successful nan long-term, nan marketplace tends to spell up (and we judge it will proceed to spell up importantly successful nan semipermanent based connected nan unthinkable spot of nan US and economy), truthful you're giving distant a batch of semipermanent upside return imaginable (as we'll explicate pinch nan floor plan below).


author illustration

On 1 hand, you whitethorn deliberation 35% little value volatility versus nan S&P 500 (SPY) is not a large deal, but complete nan semipermanent you will miss retired connected melodramatic compounding of returns. For example, if you put $100,000 successful nan S&P 500 and it gains 10% per twelvemonth for nan adjacent 30 years, versus $100,000 successful JEPI, JEPI whitethorn only summation 6.0% per twelvemonth complete nan aforesaid clip play (after nan 35% volatility reduction, fees and trading costs--more connected this successful a moment). You will person fundamentally fixed distant complete $1.1 cardinal dollars successful returns for yourself and/or your heirs.

On nan different hand, if you're extremity is simply precocious income payments pinch little volatility, past you still whitethorn beryllium 100% comfortable owning JEPI. Just cognize that nan dividend output is apt to shrink (as volatility falls), your opportunity costs will beryllium very large, and immoderate finance banker down nan scenes is profiting by penning those ELNs and arbitraging monolithic profits disconnected your beardown aversion (perhaps excessively strong) to short-term marketplace volatility. Again, you whitethorn beryllium wholly good pinch this.

More JEPI Costs and Expenses:

Expenses and High Portfolio Turnover: The full disbursal ratio connected JEPI is 0.35%-mostly reasonable for an ETF, but perfectly a detractor from your full returns arsenic an investor. What's more, nan money has a very precocious turnover ratio (recently 195%) which tin adhd important hidden and implicit trading costs that are not included successful nan full disbursal ratio. Here is really JEPI describes it successful their summary prospectus:

"The Fund pays transaction costs, specified arsenic commissions, erstwhile it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover complaint whitethorn bespeak higher transaction costs and whitethorn consequence successful higher taxes erstwhile Shares are held successful a taxable account. These costs, which are not reflected successful yearly money operating expenses aliases successful nan Example, impact nan Fund's performance. During nan Fund's astir caller fiscal year, nan Fund's portfolio turnover complaint was 195% of nan mean worth of its portfolio."

Taxes: Taxes are different important consideration. As you tin spot successful nan floor plan below, after-tax returns for JEPI person been importantly little than before-tax returns (and each that precocious trading described earlier makes things worse).

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JEPI Summary Prospectus

Here is 1 measurement JEPI describes taxes successful its summary prospectus (with regards to taxable and non-taxable accounts):

To nan grade nan Fund makes distributions, those distributions will beryllium taxed arsenic mean income aliases superior gains, isolated from erstwhile your finance is successful an IRA, 401(k) scheme aliases different tax- advantaged finance plan, successful which lawsuit you whitethorn beryllium taxable to national income taxation upon withdrawal from nan tax-advantaged finance plan.

ESG Considerations: As portion of its finance process, JEPI seeks to measure nan effect of environmental, societal and governance ("ESG") factors connected galore issuers successful nan beingness successful which nan Fund invests. To immoderate investors this is simply a bully thing; to others it is simply a distraction. Like different strategies, ESG investing goes successful and retired of favor. For example, it was very celebrated a mates years agone erstwhile JEPI was launched, but is falling retired of favour pinch immoderate investors (as immoderate US states proceed to sue ample finance managers, specified arsenic BlackRock (BLK) complete their ESG practices which arguably are a clear dereliction of their fiduciary responsibilities to investors). From a trading standpoint, JP Morgan astir apt thought nan ESG facet was a bully trading strategy erstwhile nan money was launched. As an investor, you request to cognize what is important to you and what is not.

Who Should (And Should NOT) Invest successful JEPI?

If your extremity arsenic an investor is precocious income pinch little volatility, JEPI whitethorn beryllium a suitable finance for you. Just cognize nan output will apt autumn (to nan precocious azygous digits, and astatine times moreover lower) and you are giving up melodramatic semipermanent return imaginable (through nan reduced volatility of nan ELN covered telephone strategy). Also cognize that JEPI's disbursal ratio is comparatively low, but still a important detractor from your semipermanent returns, and truthful are nan fund's precocious implicit trading costs (related to very precocious portfolio turnover), nan ELN strategy and perchance nan ESG considerations, arsenic well.

On nan different hand, if your extremity is to maximize semipermanent full returns, JEPI is apt an perfectly unspeakable finance for you (for each of nan reasons described above). Said differently, if your finance sky is 10 years aliases less, JEPI mightiness beryllium conscionable okay (but not great), but if your sky is much than 10-years--avoid JEPI for illustration nan plague!

Two (2) Better Long-Term Big Yields:

If you are a semipermanent investor, an S&P 500 scale money (SPY) will apt dramatically outperform JEPI, but it won't salary you nan large income you want. And since immoderate investors aren't consenting to conscionable retreat immoderate of their S&P 500 gains to usage arsenic spending rate (they conscionable want those large JEPI-style dividends), present are a mates amended big-yield opportunities (described below). We judge some big-yield opportunities should beryllium considered wrong nan constructs of a prudently diversified semipermanent income-focused portfolio. They'll some apt lead to dramatically amended semipermanent high-income results than JEPI, particularly erstwhile held wrong a much broadly diversified high-income-focused portfolio.

(1) The Reaves Utility Income Fund (UTG)


Reaves Utility Income Fund

The Reaves Utility Income Fund is simply a closed-end money ("CEF") that invests successful securities (mostly stocks) operating chiefly successful nan Utilities assemblage (a assemblage known for little volatility and higher dividend income). And contempt its higher guidance fees and disbursal ratio, it will apt handily outperform JEPI complete nan adjacent decade (higher returns and comparable monthly income payments) for nan reasons described below.

First, UTG's holdings people person little volatility than nan emblematic S&P 500 banal (this is simply a wide characteristic of Utilities stocks), but dissimilar JEPI, UTG will use much afloat from nan banal market's semipermanent gains. Specifically, JEPI limits its upside by only participating successful astir 65% of nan markets semipermanent gains (due to its covered telephone ELN strategy), whereas UTG uses a prudent magnitude of leverage (i.e. borrowed money) to much afloat participate successful nan market's semipermanent gains (UTG recently employed ~19.3% leverage). Said differently, JEPI's semipermanent gains are hamstrung whereas UTG's semipermanent gains are prudently enhanced. Not only does nan UTG leverage amended semipermanent returns, but it does truthful capable to offset nan strategy's higher guidance interest and disbursal ratio.

Further, some fund's salary monthly income, but JEPI's output is group to fall, whereas UTG's output is group to stay beardown (see UTG's since-inception distribution payments successful nan floor plan below).


CEF Connect

If you are seeking a high-monthly-income money and beardown returns, UTG's full returns will apt hit JEPI's very importantly complete nan adjacent decade and beyond. Especially considering we for illustration nan Utility Sector correct now (it's been comparatively anemic year-to-date successful a spot of short-term mean reversion arsenic compared to growthier sectors which person been whipsawed by unusually beardown year-end taxation nonaccomplishment trading followed by early 2023 beardown gains).

(2a) The Adams Diversified Equity Fund (ADX)



If you are a semipermanent income-focused investor, nan Adams Diversified Equity Fund is simply a amended action than JEPI. Period. It will connection amended full returns pinch a comparable magnitude of income.

For starters, ADX is simply a closed-end money that has been paying large dividends to investor for complete 80 years straight. It guarantees astatine slightest a 6% distribution each year, and it is usually importantly higher. The mean yearly distribution connected ADX is comparable to what JEPI's mean yearly distribution will beryllium successful nan years up (for nan reasons we explained earlier). Further, ADX presently trades astatine ~14.9% discount to its nett plus worth (i.e. "NAV" aliases nan aggregate worth of its underlying portfolio holdings). This type of ample discount is simply a unsocial characteristic of closed-end costs (it's mostly not allowed connected ETFs, and location are mechanisms and arbitrageurs successful spot to make judge it fundamentally ne'er happens for ETFs, for illustration JEPI). And this discount helps much than offset ADX's 0.56% yearly disbursal ratio.

ADX invests actively successful US equities crossed marketplace sectors, and it has historically delivered nett returns that are comparable (usually better) than nan S&P 500--a feat JEPI will simply not beryllium capable to execute complete nan long-term. What's more, ADX tin beryllium a awesome compliment to income-investor portfolios because it invests crossed sectors, including sectors that galore income-focused investors (and JEPI successful particular) importantly miss retired connected (such arsenic exertion and discretionary).



One communal title pinch ADX is that is pays dividends quarterly. Specifically, it pays a smaller dividend successful quarters one, 2 and three, followed by a larger 4th fourth dividend to bring nan yearly output importantly higher. Here is simply a look astatine its caller dividend history.


CEF Connect

Investment websites notoriously misreport the ADX dividend because their output calculation methodologies simply cannot grip nan yearly ADX small-small-small-big distribution cadence. But if you tin grip that pattern--you will do dramatically amended pinch ADX (than pinch JEPI) complete nan agelong term.

(2b) 25% PIMCO Dynamic Income Opps (PDO)



If you simply cannot slumber astatine nighttime pinch nan afloat volatility of nan S&P 500, you mightiness besides see adding an allocation to PIMCO's celebrated enslaved money (PDO). It gives you large dependable monthly distribution payments (the existent output is 10.9%--above what JEPI's semipermanent mean will be), and typically reduces your aggregate volatility erstwhile paired pinch an allocation to a banal money specified arsenic ADX. For example, a 25% allocation to PDO positive a 75% allocation to ADX will apt dramatically outperform JEPI complete nan adjacent decade successful position of full returns; and it will besides springiness you large dependable income, positive importantly little volatility arsenic compared to nan S&P 500. For perspective, PDO:

  • invests opportunistically crossed nan enslaved markets, including firm bonds, slope loans and asset-backed securities, to sanction a few.
  • has ne'er decreased its distribution (only accrued it).
  • has a history of occasionally paying further typical dividends.
  • trades astatine only a 4.1% premium to NAV, which is comparatively rather mini for a PIMCO enslaved money (PIMCO is nan marketplace leader successful enslaved funds).
  • uses ~50% leverage to magnify returns and income (this is simply a patient "full" dose of borrowing that we're comfortable pinch considering nan competencies and resources of PIMCO).

And besides highly important, specified a operation (25% PDO, 75% ADX) whitethorn get you reasoning astir investing from nan aggregate portfolio position (instead of conscionable looking astatine each finance successful isolation--the correction galore investors make erstwhile considering JEPI); nan aggregate portfolio attack tin thief you trim risks while keeping your income and full returns high.

The Bottom Line:

If you are looking for bigger monthly income and little value volatility (as compared to nan S&P 500) JEPI whitethorn beryllium suitable. Just cognize that complete nan long-term, JEPI's output will apt autumn importantly and your full returns are group to dramatically underperform different big-yield opportunities, specified arsenic those discussed successful this report. In fact, we precocious classed nan different opportunities successful this article (including ADX, PDO and UTG) successful our caller free report: Top 25 Big-Yield CEFs, ETFs (6% to +12% Yields). And for comparison purposes, we besides see a ton of existent information connected complete 100 big-yield CEFs and ETFs successful that study for you to consider.

However, astatine nan extremity of nan day, you request to put only successful opportunities that are correct for you and your individual situation. We judge disciplined, goal-focused, semipermanent investing will proceed to beryllium a winning strategy.

Finally, if you are looking for much big-yield ideas, peculiarly from nan aggregate portfolio building standpoint, see our caller "High Income NOW" Portfolio. It has 26 holdings and offers a existent output complete 9.0%. You tin entree it (and a batch much ideas) astatine a discounted value though our Big Dividends PLUS service. We're offering 32% Off all caller yearly subscriptions arsenic portion of our Introductory Flash Sale.

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Editor: Naga

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