JEPI Manager Reiner Calls Cash Allocation Key

Portfolio construction is always important, but with $6.4 trillion in cash still sitting in money-market funds as of the first quarter of 2024 and equity valuations holding near all-time highs, how financial advisors allocate client cash will have ramifications.

“Thinking about how you allocate your cash for the next one, three, five,10 years will be very important,” says Hamilton Reiner, portfolio manager and architect for JPMorgan’s two covered-call strategy exchange-traded funds, the $34.1 billion JPMorgan Equity Premium Income ETF (JEPI) and the $14.9 billion JPMorgan Nasdaq Equity Premium Income ETF (JEPQ).

The rise of covered-call strategies introduces income as a component of total return, and it also means that participation in the equities market is not a binary outcome of making money in up markets and losing money when stocks fall. “When you do a covered call strategy, when we think about it, there are multiple ways of winning,” Reiner says. 

Covered-call ETFs, also known as buy-write or call overwriting, have become massively popular with investors since JEPI’s 2020 launch (JEPQ debuted in 2022). These funds use puts and calls to help limit losses, although investors can still lose money, while capping upside gains. 

JEPI’s success has led to a wave options-based ETFs—so many that some industry watchers call the strategy a bubble, but Reiner disagrees. There are many ways to construct a buy-write strategy, from choosing an index, constructing the underlying loan portfolio, deciding on active or passively management, to the frequency of writing the options.

“When people talk about call overwriting, it’s like saying it’s a car. There are so many variations,” he says. 

JEPI, JEPQ Lag Index Funds

Critics point out that JEPI’s 8.2% year-to-date return and JEPQ’s 12.7% gain lag the SPDR S&P 500 ETF Trust (SPY) 16.6% gain and the Invesco QQQ Trust (QQQ) return of 15.4%, but Reiner says those comments miss the point. With less volatility and less beta, they’re not expected to outperform on the upside. The strategies may shine in rangebound markets or those that drifter up since there’s a chance of making money on options premium. 

JEPI’s and JEPQ’s high income target without using leverage makes them popular, but Reiner says income wasn’t the primary goal; it was how to capture asymmetry from an investment, to give an investor more upside relative to the downside. The point is to get people invested and stay invested. 

“When the market goes down, the way we approach call writing, is it tends to hang in better. That’s how we thought about JEPI,” he says, pointing out that JEPI lost 3.5% in 2022’s market rout, while SPY fell 18.2%.

The ideal client for JEPI or JEPQ, he says, is someone who wants conservative equity exposure and wants income, or someone who wants lower volatility to complement existing holdings. It’s not for the person who wants traditional beta exposure provided by the S&P 500 or Nasdaq 100. Reiner is a client, too, saying 90% of his own assets are in the strategies. 

With the macroeconomic environment potentially changing if the Federal Reserve cuts interest rates in September, the income feature of JEPI and JEPQ may become more attractive, since yields will begin to soften. Reiner also points out a unique feature of the ETFs. While these ETFs carry equity risk, they don’t have the duration nor credit risk found in traditional fixed income since the options strategy provides the income.

Advisors with tax-sensitive clients may want to consider putting JEPI or JEPQ in a tax-advantaged account since the income kicked off by options is taxed differently than debt-related income. But the taxes shouldn’t be too onerous. 

“Even on an after tax basis, you're pretty happy with our income, relative to other after tax returns,” Reiner says.