Stocks of the JPMorgan Equity premium income ETF (JEPI), which jumped in price from $48, to $57, are hovering around their all-time record high.
JEPI ETF also has attracted significant inflows, helped by Wall Street’s ongoing craze for covered call funds which provide the highest dividend yields. Is JEPI ETF a fund worth investing in?
The JEPI ETF is a fund that invests in JEPI ETF
JEPI, which has over $41 Billion in assets under management, is the largest exchange-traded funds (ETFs) within its covered call fund category. The fund has seen net inflows in excess of $4 billion in this year. This trend has continued since the inception.
The JEPI ETF earns returns two ways. The team first creates a diverse portfolio of companies. The majority of the companies in this portfolio are from the tech sector.
In this fund, the biggest brands are Alphabet and Mastercard. Other well-known companies include Meta Platforms Nvidia Visa. The company in this instance benefits from the performance of the fund, which is on an upward trend in recent years.
JEPI complements its strong return by using a technique known as a “covered call”, whereby it launches a trade of call options tied to blue-chip S&P 500 Index where these companies are all included.
The fund can then use the income generated by the premium of the call options to pay a dividend to its investors. Only the option trade has a limitation. It can only profit if there is a bull market and when the strike price of the call is met.
Investors have reaped great rewards from the JEPI ETF, as its dividend yield is over 7.8%. The JEPI ETF offers a higher dividend yield than other popular funds like VOO or SPY.
What is the value of JEPI?
Investors in the US stock market have three options. They can first select stocks and build a portfolio. Many people have used this option in the last decade.
The second option is to use passive funds which track well-known indexes such as the S&P 500 or the Nasdaq 100. The lower costs and long-term record of strong returns, which beat inflation, make this option popular.
Active management is the third choice, and ETFs such as JEPI or JEPQ are available. Due to the large returns that these funds provide, investors are flocking towards them.
A closer look reveals that investors who choose to invest in S&P 500 Index are better off than those who pursue its high dividends. Bloomberg reports that JEPI underperformed S&P 500 Index in terms of total returns by 58%. Below is a chart showing the total returns of JEPI over the past three years compared to the VOO ETF.
Hamilton Reiner who is the CEO of JEPI told this publication that JEPI’s goal was not to maximize profits, but to minimize volatility and offer an income. Investors should look for investments that offer a higher total return.
The tax efficiency of the payouts based on derivatives is worse for JEPI because they don’t receive the preferred treatment given to qualified dividends. They are instead taxed on the basis of ordinary income, which is an awful idea.
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