JEPI: Above 6% Dividend Yields for Your Portfolio in a Rising Rates Environment

I first came across the JPMorgan Equity Premium Income ETF (JEPI) after it came in third place of the top 20 actively managed ETFs by net new assets for November 2021. The fund had garnered $506 million in November 2021 alone and from its inception in May 2020 up to January 4, total assets amounted to an impressive $5.90 billion.

Looking at the reasons for this substantial growth, I saw that JEPI offered an enticing 8% dividend yield. Now, with interest rates scheduled to rise in 2022 as part of the Fed tightening monetary policy, we can expect the yield on the 10-year Treasury note to reach 2% this year, up from the current 1.70% level. Rising rates are also the reason for which growth stocks, which are highly valued and pay little dividends are suffering from a market downturn, with the NASDAQ Composite being down by nearly 2% this week while the Dow Jones Industrial Average is up by 1.2%.

Additionally, as shown in the figure below, the fund prides itself on offering more dividends than other asset classes.

Source: jpmorgan.com

Investigating into the reasons for this superior yield, I first noticed that the fund charges an expense ratio of just 0.35%, which is mid-way between passive index-tracking on the one hand, and actively managed, on the other. Additionally, its operational strategy combines equities with options to strike a balance among yield, capital growth, and risk. Thus, JEPI seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to providing monthly income.

In order to achieve this aim, the fund managers build a higher-quality, lower-beta portfolio of U.S. large-cap equities with less volatile earnings and share prices based on JP Morgan’s years of experience. Then, they sell index options against that long-only portfolio and use the premiums to generate income. These results in a rather conservative equity income strategy designed to reduce downside exposure by forgoing some upside participation.

Verifying these claims, I tracked JEPI’s dividend yields as well as for the SPDR Bloomberg Barclays High Yield ETF (JNK) and the iShares Global REIT ETF (REET) for comparison purposes. I also included the Schwab U.S. Dividend Equity ETF (SCHB) as a popular passive and index-following fund. The results are in the chart below with JEPI’s superiority being confirmed.

Source: ycharts.com

However, as some would have noticed, the ETF’s yield has fallen from 8% to 6.57% over a six months period while peers have been much less impacted. This is partly explained by the ETF rising by 25.9% since May 2020 (blue chart below), which ultimately means that the yield, which is the dividend as a percentage of the share price falls.

Additionally, as shown in the orange chart, the monthly dividends paid are on a net uptrend after being on a downtrend from January to September 2021. This is made possible by the options strategy, consisting of selling call options every week to adapt to changing market conditions as is currently the case. Hence, with volatility spiking, JEPI is delivering on its mandate to provide higher income, thus providing investors the cushion they need against fluctuating market prices.

Source: ycharts.com

Finally, JEPI makes sense as an innovative income source spanning across sectors (Consumer Staples, Financials, Healthcare, IT, energy, etc) and avoids the duration risks of higher-yielding bonds (junk bonds). At the same time, it brings the invaluable experience of people, processes, and philosophy from the mutual fund world to the management of ETF, all in a low-cost fashion.