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This dividend ETF has a yield of 12% and is beating the S&P 500 by a significant amount


Most investors like to keep things simple, but digging into the details can be lucrative — it can help you align your options with your goals.

JPMorgan Equity ETF Premium Income Fund
JEPI,
+0.20%

was able to take advantage of the increased volatility in the stock market to beat the total returns of the benchmark index, the S&P 500.
SPX,
+1.19%
,
at the same time bring increasing source of monthly income.

The fund’s goal is to “deliver a substantial portion of the returns associated with the S&P 500 Index with less volatility,” while also paying a monthly dividend, according to JPMorgan Asset Management. It does this by maintaining a portfolio of about 100 selected stocks of high quality, high value and low price volatility, and using a guaranteed call strategy ( described below) to increase income.

This strategy may underperform the index during bull markets, but it is designed to be less volatile while offering high monthly dividends. This can make it easier to keep investing through the kind of recession we saw last year.

JEPI was launched on May 20, 2020 and has rapidly grown to $18.7 billion in assets under management. Hamilton Reiner, who co-manages the fund with Raffaele Zingone, described the fund’s strategy and success in the 2022 bear market, and shared his thoughts on what might lie ahead.

Exceptional performance with a smoother ride

First, here’s a chart showing how the fund has performed from its inception through January 20, compared to the SPDR S&P 500 ETF Trust
spy,
+1.20%
,
both have dividends reinvested:

JEPI is less volatile than SPY, which tracks the S&P 500.

Datasets

The total returns of the two funds since May 2020 are pretty much matched, however, the JEPI is much less volatile than the SPY and the S&P 500. Now let’s see the performance comparison over the interest rate time period. increase since the end of 2021:

Increased share price volatility in 2022 has helped JEPI earn additional income through its covered call strategy.

Datasets

That total return is after annual expenses of 0.35% of assets under management for JEPI and 0.09% for SPY. Both funds have had negative returns since late 2021, but JEPI has performed much better.

“Income is the result.”


— Hamilton Reiner

income component

What investors is JEPI designed for? “Income is the result,” Reiner replied. “We see a lot of people using this as a fixed tenant for income-driven portfolios.”

The fund quotes a 30-day SEC yield of 11.77%. There are different ways to look at the dividend yield of mutual funds or exchange-traded funds, and the 30-day yield is used to compare. It is based on the fund’s current income distribution profile relative to its price, but the distribution of income that investors actually receive will vary.

It turns out that over the past 12 months, JEPI’s monthly distribution has ranged from 38 cents a share to 62 cents a share, with an upward trend over the past six months. The sum of the previous 12 distributions was $5.79 per share, with a distribution yield of 10.53%, based on the ETF’s closing price of $55.01 on Jan. 20.

JEPI invests at least 80% of its assets in stocks, mainly selected from stocks in the S&P 500, and invests in equity-linked bonds using a covered call strategy. help increase earnings and reduce volatility. Covered calls are described below.

Reiner said that in a typical year, investors in JEPI should expect monthly distributions to deliver “high single-digit” annualized returns.

He expects that level of earnings even as we move back into the low-interest-rate environment before the Federal Reserve rate hike cycle that began early last year to push inflation down.

JEPI’s approach may be appealing to investors who don’t need income right now. “We also see people using it as a conservative approach to equity,” said Reiner, who expects the fund to have 35% lower price volatility than the S&P 500.

Returning to the issue of earnings, Reiner said JEPI is a good alternative even for investors willing to take on the credit risk with high-yield bond funds. These funds have higher price volatility than investment-grade bond funds and face a higher risk of loss when the bond defaults. “But with JEPI, you have no credit risk or term risk,” he said.

An example of a high yield bond fund is the iShares 0-5 Year High Yield Corporate Bond ETF
SHYG,
-0.10%
.
It has a 30-day yield of 7.95%.

When discussing JEPI’s stock selection, Reiner said “there is a significant positive component to the 90 to 120 names that we invest in.” He said the stock selection was based on the recommendation of JPM’s analysis team for the “most attractively priced stocks in the medium and long term”.

Individual stock selections do not affect dividend yield.

Covered call strategies and an example of a covered call trade

JEPI’s high earnings are an important part of its low volatility total return strategy.

A call option is a contract that allows an investor to buy a security at a specified price (called the strike price) until the option expires. A put option, on the other hand, allows the buyer to sell a security at a specified price until the option expires.

One mention Call options are an investor can write when they already own the stock. The strike price is “out of money”, which means it is above the current price of the stock.

This is an example of a covered call option offered by Ken Roberts, investment advisor at Four Star Wealth Management in Reno, Nev.

  • You bought stock in 3M Co.
    MMM,
    +1.63%

    on January 20 for $118.75.

  • You sold a $130 call with an expiration date of January 19, 2024.

  • The premium for the $130 call on January 24 was $7.60 at the time the MMM sold for $118.75.

  • MMM’s current dividend yield is 5.03%.

  • “So the maximum return on this trade before the dividend is $18.85 or 15.87%. Add in the distributed earnings and you get a maximum return of 20.90%,” Roberts wrote in an email exchange Jan.

If you have made this trade and 3M’s stock has not risen above $130 by January 19, 2024, the option will expire and you are free to write another option. This option alone will yield an income equivalent to 6.40% of the purchase price on January 20 for a period of one year.

If the stock rises above $130 and the option is exercised, you will eventually get the maximum profit as described by Roberts. Then you will need to find another stock to invest in. What did you risk? Further increase beyond $130. So you should write the option only if you’ve decided you’re ready to part with your MMM stock for $130.

The bottom line is that the call options strategy reduces volatility without the added downside risk. The risk is the opposite. If 3M shares had doubled in price before the options expired, you would still sell them for $130.

Reiner said JEPI pursues a covered call strategy by purchasing equity-linked notes (ELNs) to “combine equity exposure with call options,” Reiner said. speak. The fund invests in the ELN instead of writing its own options, because “unfortunately, options premium income is not considered honest income. It is considered a gain or payback,” he said.

In other words, the fund’s distribution may be better reflected in its 30-day return, because option earnings will likely not be included.

An obvious question for a fund manager whose portfolio has grown rapidly to nearly $19 billion is whether the size of the fund makes it difficult to manage. Some smaller funds pursuing narrow strategies have been forced to close to new investors. Reiner said the JEPI’s 2% weighted limit on a portfolio of about 100 stocks would mitigate size concerns. He also said that “S&P 500 Index Options are the most liquid equity product in the world,” with more than $1 trillion in daily trades.

Summarizing action for 2022, Reiner said, “investment is for balance.” Increased price volatility increases the option premium. But to further protect investors, he and JEPI co-manager Raffaele Zingone also “give them more upside potential by selling the call for a little bit more than they earned. “.

Do not miss: These 15 dividend aristocratic stocks are the best income generators

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