Why JEPI Is Attractive to Nervous Investors

Find out how JEPI works and what makes it the fastest-growing ETF today.

kent
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Research Lead
Reviewed by: Lisa Barr
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Edited by: Lisa Barr

JEPI’s historic rise and its attraction from risk-averse investors are easy to understand, although the strategies that make it work are not. The fund uses a covered call strategy to produce yields that have trended more than double that of a plain vanilla dividend ETF, with roughly 35% lower volatility.

In this article, we provide the basics on how JEPI works, what kind of investors may want to consider the fund, the pros and cons associated with owning shares and examples of other ETFs like JEPI.

What Is JEPI? 

The JPMorgan Equity Premium Income ETF (JEPI) is an actively managed exchange-traded fund that seeks to provide similar returns as the S&P 500 index, with lower volatility plus monthly income. To achieve this dual objective, JEPI holds value stocks with favorable risk/return characteristics and owns equity-linked notes (ELNs) structured to use as a covered call strategy. 

As a covered call ETF, JEPI can use a covered call writing strategy on a portion of its portfolio to generate additional income for investors while still providing exposure to the underlying stocks in the portfolio. 

Why Investors Are Interested in JEPI 

Many investors are interested in JEPI because this ETF offers high yields and low volatility, which can be especially attractive features to risk-averse investors in a low-yield environment coinciding with a bear market. Add in the active management feature and investors get hedge-fundlike results within a low-cost ETF wrapper.

Some of the main reasons investors are interested in JEPI include: 

  • High yields: JEPI is designed to deliver 5% to 8% yield over time but has reached yields above that range. These yields are much higher than traditional dividend ETFs, which typically produce half that of JEPI’s yield. 
  • Low volatility: JEPI aims to produce 6% to 10% annual returns, 85% that of the S&P 500, but with 35% lower volatility.
  • Active management: In down markets, especially when stocks and bonds are both negative, as they were in 2022, active management combined with low volatility can potentially outperform passive management. 

Pros and Cons of Investing in JEPI 

JEPI offers investors several benefits, such as income generation and reduced volatility. However, JEPI and ETFs like it also present some risks, such as market risk and counterparty risk, that investors should know about before buying shares of these funds.

Here are some of the main benefits and risks of covered call ETFs:

Pros of Investing in JEPI 

  • Reduced volatility: By holding large cap value stocks with favorable risk/return characteristics, and owning ELNs with covered call writing strategies, JEPI aims to achieve 85% of the returns of the S&P 500, with 35% less volatility. 
  • Income generation: Covered call ETFs like JEPI can provide income with yields significantly higher than traditional ETFs. 
  • Low expenses: JEPI’s expense ratio of 0.35% is low for an actively managed ETF. 

Cons of Investing in JEPI 

  • Market risk: Like all investment securities, JEPI is subject to market risk. For example, although JEPI can reduce market volatility, negative returns can still occur, as was the case in 2022 when JEPI outperformed stocks and bonds but still had a price decline of –3.52%. 
  • Option risk: The covered call strategy used by JEPI presents option risk, which is present if the price of the underlying stock increases significantly, and the ETF may have to sell the stock at the strike price, which could result in a loss.
  • Counterparty risk: Writing covered calls and using ELNs creates counterparty risk, which is the risk that the buyer of a call option won’t be able to fulfill their end of the contract, or the issuer of an ELN won’t be able to meet their debt obligation.
  • Complexity: Investors are wise to consider buying shares only in investment types that they understand, and JEPI’s unusual combination of active management and use of ELNs and covered call strategies make them primarily suitable for experienced investors. 
  • Short track record: JEPI’s inception is May 20, 2020, which is not enough of a performance history for investors to know how the fund may perform over a longer period.

ETFs That Are Similar to JEPI 

JEPI is among the fastest-growing ETFs in recent history, with $26.78 billion in assets under management accumulated in its first three years since inception, according to our etf.com fund flow tool. In that time frame, JEPI averaged approximately a 9% yield, with lower volatility than the S&P 500. Thus, it’s no surprise that investors seek out other ETFs that are like JEPI, such as QYLD, XYLD and RYLD. 

Fund companies also jumped on the covered call ETF excitement in 2023, as multiple JEPI copycat ETFs have been launched.

ETFs similar to JEPI include: 

Global X NASDAQ 100 Covered Call ETF (QYLD): QYLD provides exposure to the growth-oriented Nasdaq-100, but earns income by selling call options and passes the premiums received on to investors net of fees. This strategy has historically produced higher yields in periods of volatility. 

Global X S&P 500 Covered Call ETF (XYLD): XYLD seeks to track the performance of the Cboe S&P 500 BuyWrite Index, and sells one-month, at-the-money call options on the index. The strategy should help to generate some income, but it also places a drag on the upside potential.

Global X Russell 2000 Covered Call ETF (RYLD): RYLD tracks the Russell 2000 index while holding a succession of one-month, at-the-money options of the index. The fund follows a covered call strategy on the underlying index. 

Is JEPI a Good Investment? 

JEPI can be a good investment for more experienced, risk-averse investors who are looking for an ETF that can provide low-volatility, stocklike returns with superior yields. However, JEPI may not be for beginners or long-term investors. For example, its hedge-fundlike qualities make the fund more complex than traditional ETFs and its performance will lag in up markets. 

As with any investment, investors should carefully consider their financial circumstances, investment goals and risk tolerance before buying shares of JEPI. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.