JEPI is a covered call ETF for the S&P 500 Index designed to mitigate volatility and generate income. I review it here.
Disclosure: Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.
Contents
Introduction – What Is JEPI and How Does It Work?
JEPI is an income ETF from J.P. Morgan. It’s called the JPMorgan Equity Premium Income ETF. In a nutshell, JEPI is holding a basket of low-volatility stocks selected from the S&P 500 Index (the largest 500 U.S. companies), on which it sells covered call options to generate income. This fund launched in mid-2020 and has quickly amassed over $3.5 billion in assets. It has an expense ratio of 0.35%.
JEPI selects stocks based on ESG criteria, valuation metrics (think value stocks that pay dividends), and low volatility. The fund’s stated objective is to match the performance of its benchmark index, the S&P 500, with lower volatility and greater yield. If the fund were able to achieve that objective (it hasn’t), it would be pretty great for a retiree. Part of JEPI’s high yield comes from the dividends of the stocks it holds. The other part comes from writing call options on those stocks.
As a brief refresher, covered call writers own the underlying and collect a premium on the option, and the buyer of the call option has the right to buy the underlying at the strike price at or before expiration. For example, if I own a fund like VOO for the S&P 500 and I think it’s going to be relatively flat for the next 30 days or so, I might sell a call option on it, for which I receive cash immediately (called the premium). The buyer of that call option is hoping VOO goes up. As the seller, I’m hoping it stays flat. Call options are usually sold to generate income in a flat or mild bear market.
JEPI vs. DIVO
If JEPI reminds you of DIVO, you’d be right. The funds are extremely similar in that they’re selecting large-cap dividend stocks from the S&P 500 and selling call options on them. They differ on a few specific dimensions, though:
- JEPI is more diversified with 95 holdings, compared to DIVO’s 23.
- JEPI is also much more popular, with about 6x the AUM of DIVO.
- JEPI has a lower fee of 0.35% compared to 0.55% for DIVO.
- JEPI has greater loading on the Value and Investment factors, while DIVO has greater loading on Size and Profitability, so they are holding different stocks.
- JEPI considers ESG criteria for inclusion; DIVO does not.
I noted previously that DIVO probably seemed the least offensive of all these popular covered call funds like QYLD, but I think I like JEPI even more given the facts above. In terms of sheer performance, JEPI and DIVO have been pretty close, but JEPI has also arguably delivered more reliably on its objective with higher returns at lower volatility. Consequently, in the very short lifespan of these two funds thus far, JEPI has generated slightly higher general and risk-adjusted returns than DIVO, though both have still lagged the broader market on both a general and risk-adjusted basis:
Recall that covered calls do not protect the downside, evidenced by the nearly identical drawdowns of all 3 portfolios above.
Is JEPI a Good Investment? Probably Not.
Just like with DIVO, I understand the desire to assemble a low-volatility basket of stocks that JEPI aims to hold, but we would still expect stock picking to underperform the market over the long term. We can also just buy a low-vol and/or value fund at a lower cost.
As I’ve noted elsewhere, covered call funds like this are inarguably only appropriate for the investor who actually needs and uses that regular income from the dividends and option premiums. That situation does not apply to me, and if you’re reading this, it very likely does not apply to you. If you’re just planning on reinvesting the fund’s distributions, it doesn’t make much sense to buy JEPI, especially in a taxable account where you’re taxed on those distributions.
If you want ESG, Value, or dividends, you can target those directly while paying lower fees. If you’re bullish on the S&P 500, buy a low-cost index fund like VOO from Vanguard and call it a day. I showed above how that has still been more efficient than JEPI historically, at least so far in its short lifespan. Remember too that covered calls here are capping the upside potential if the index rallies.
You can also just create your own dividend that way instead of having the fund do it for you, which I’ve shown should be mathematically preferable anyway, as it allows more money to stay in the market longer. I think “income” is overrated anyway. I’d be more likely to go with something like SWAN and just set up an automatic monthly transfer from the brokerage account that sells shares for me; there’s my “income.” Again, I’m not a dividend investor anyway, so these types of yield-focused strategies don’t appeal to me regardless. I’d rather create my own dividend when I want to.
Recall too that covered calls do not protect the downside. The option premium received does not help you much in a market crash (mental accounting, anyone?), and we’d expect these funds to crash just about as deeply as their benchmark index. The income investor for whom JEPI is suitable should almost certainly also still have bonds in the portfolio.
What do you think of JEPI? Let me know in the comments.
Disclosures: I am long VOO in my own portfolio.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
What about interest rate sensitivity?
I’m almost commenced my retirement and rearranging my portfolio. I’m trying to add some (within reason) high yield income funds, from which I’ll spend the income (rather than reinvest).
I see many of the high yield income ETFs are getting hammered as the 10 year yield rises. Does a fund like JEPI exhibit the same problem?
Yes. As noted, JEPI is just writing covered calls on stocks. It will fall with the stock market.
Income is overrated. Wow…if you’re retired and you don’t want to sell shares and need money to pay for stuff, what do you do?
You have to withdraw from your account either way. As I noted, whether that withdrawal comes from dividends, option premiums, or cap gains is largely irrelevant and is just mental accounting.
You should mention JEPI as a vehicle for income within a ROTH. As you reach the age, just before required distributions kick in, you will be earning 7-8% income tax free in a ROTH on JEPI holdings assuming dividend levels remain the same. Imagine holding a muni earning that rate and at the same time receiving some growth on your investment. I agree with your positing on growth and clipping a coupon as a way of providing income vs owning high dividend paying stocks assuming you are in a growth vehicle which is exceptionally tax efficient to begin with. A wise man told me many years ago that the only way to accumulate real wealth was to beat the tax man… legally of course.
Again, share price adjusts for that “income.” Account type is irrelevant to that fact. Obviously an IRA is preferable if you’re using a high-yield strategy.