JP Morgan’s JEPI Soars, Set to Become No. 1 Active ETF

The astronomical growth of the JPMorgan Equity Premium Income ETF (JEPI)—pulling in nearly $5 billion this year as investors pile into active exchange-traded funds in an effort to beat the market—has caught even its managers off guard.  

“I didn't tell you ‘yes,’ that'd be crazy, right?” co-manager Hamilton Reiner told ETF.com when asked if he was surprised at the fund’s inflows. “It was the No. 1 asset gather last year across all active strategies, mutual funds, ETFs, closed-end funds.”  

A few years ago, the most successful actively managed fund was Cathie Wood’s flagship ARK Innovation ETF (ARKK). With $28 billion in assets under management at its peak in 2021, ARKK was the epitome of active ETF success.  

But that fund has moved in an opposite direction from JEPI, and now holds $7.4 billion, about a quarter of its peak assets. It’s no longer the largest actively managed U.S.-listed ETF, a title that may soon go to JEPI, one of the top asset-gathering funds of the year so far.  

JEPI is luring in assets so quickly that, barring another big leg down in the stock market, it has a good chance to grab the top spot this year. In 2021, the fund held a meager $170 million. Since then, its assets have exploded to $22 billion, according to ETF.com data.  

This year alone, investors have added $4.6 billion to the ETF, more than every ETF except the JPMorgan BetaBuilders Europe ETF BBEU. 

JEPI’s growth comes as investors jump into funds with a manager at the helm—despite their added management fees—in hopes of beating passive funds that track indexes’ market share this year as investors search for returns in gyrating markets.  

Year to date, actively managed ETFs have pulled in $22.2 billion, Bloomberg data shows. Last year, $57.4 billion flowed into active products, according to ETF.com data. Almost 48% of actively managed ETFs had positive inflows compared to roughly 45% of passively managed ETFs, ETF.com data shows.  

Unique Strategy  

Still, the success of JEPI was far from predictable. It’s not managed by a media darling like ARKK and it’s not an ETF with a straightforward mandate. 

In fact, at first glance, JEPI’s strategy may be hard to understand. The fund invests in equity-linked notes, a type of debt that provides returns linked to underlying instruments within the ELNs. 

In JEPI’s case, these ELNs mimic the returns of an S&P 500 covered call strategy. This type of strategy, seen in funds like the Global X S&P 500 Covered Call ETF (XYLD), generates yield at the expense of capping price appreciation potential. 

The ELNs that JEPI owns convert the options premiums received into coupons that are distributed monthly. 

JEPI invests up to 20% of its net assets in these ELNs, though their weighting in the fund usually hovers around 15%. 

The rest of the ETF is invested in what may be called a low-volatility value strategy. Undervalued stocks are selected from within the S&P 500 universe and then put together in a way that creates a portfolio that has lower volatility than the index. ESG factors may be used as well in stock selection. 

The result is a low-volatility, large cap portfolio, but one that has a much more active bent than other low-volatility strategies.  

Value Stocks First 

According to Reiner, one of the key features of the fund is that this isn’t an ETF that employs a mechanical low-volatility strategy.  

“We’re not going to go in and screen the S&P 500 and say we want the lowest-vol names in the portfolio, because then you’ll be all utilities and consumer staples,” he said in an interview with ETF.com. 

Reiner and his team first look for stocks that are attractive over the medium term, and then home in on names that have less price volatility and earnings variability.   

“It's first and foremost a valuation-driven process,” he said.

JEPI’s approach results in a portfolio that doesn’t have the sector and stock biases of some other low-vol ETFs. Every stock in the fund is capped at 2%, while sectors are capped at 17.5%. 

Unique Portfolio  

JEPI’s combination of a low-vol value and covered call strategy results in a unique portfolio with a double-digit yield (over 10% currently). That yield comes from both option premiums and dividends. 

It’s a strategy that performed well in 2022—losing only 3.5% versus an 18.1% loss for the S&P 500, and one that has outperformed since its inception in May 2020—39% versus 34.5% with lower volatility. What’s more is that JEPI does it for a 0.35% expense ratio, below the average 0.7% an active fund charges in the U.S., according to ETF.com data.  

“It actually does something for clients that either they can't do themselves, or at 35 basis points, they wouldn't want to do themselves,” Reiner said.   
 
 
Contact Shubham Saharan  at  [email protected] 

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