Newcomer FEPI Hopes to Catch JEPI Wave

As pain and uncertainty continues to spread across the bond markets, one ETF issuer is hoping to entice income investors by leveraging the growth and popularity of the biggest technology companies. 

The REX FANG & Innovation Equity Premium Income ETF (FEPI), which started trading Wednesday morning, employs a covered call strategy similar to the wildly popular JPMorgan Equity Premium Income ETF (JEPI). 

One main distinction between the two funds is the potential volatility of the underlying investments on which the call options are written. JEPI invests in low-volatility stocks to replicate the return of the S&P 500 Index and employs a covered call strategy to sell the potential upside of the index to buy bank-issued structured notes that generate income and reduce volatility. 

FEPI, by comparison, invests in the 15 largest U.S. technology stocks through the FANG & Innovation Index for growth, and employs a covered call strategy on the potentially more volatile underlying equities to generate income. 

“Our goal is to marry something a lot of covered call strategies attempt to do, but fail,” said Scott Acheychek, chief executive officer of REX Shares. “We’re trying to grab the growth of the underlying and provide potential for high income.”  

Ironic as it might sound, Acheychek is pitching the strategy anchored in high-flying tech stocks as an “alternative income” that is suited for the times. 

“I feel like the world of fixed income is a mess, where we’re seeing losses that are comparable to equity losses seen in the financial crisis and dot-com bubble,” he said. “The 60/40 portfolio is quite challenged, which is opening the door to alternative income strategies.” 

The FEPI Strategy 

While FEPI is currently the only REX Shares ETF, the company has nearly two dozen ETF filings before the Securities and Exchange Commission, and the asset manager has a solid background in derivatives trading and exchange traded notes. 

“The REX Shares team is fairly experienced with a good reputation,” said Aniket Ullal, head of ETF data and analytics at the research firm CFRA. 

Ullal said FEPI is “in the category of ETF issuers trying to replicate the success of JEPI,” a $29 billion fund that has taken in $12.5 billion so far this year. 

But while JEPI, which is up about 4% year to date, has gained appeal as a low-volatility way to track the broad market, FEPI is dialing it up on the performance side with an underlying index that is up 63% this year. 

“This kind of product would be more appealing because you can stay invested in tech and earn some income from the options strategies,” Ullal said.  

Downside Potential of Covered Call Strategies 

However, because there is no such thing as a free lunch, these kinds of covered call strategies can be hurt in strong stock market rallies. 

Acheychek acknowledged the downside potential of FEPI if tech stocks rallied hard, but added, “I’m not convinced this market will continue this rally significantly.” The key to the strategy, he said, is the ability to harness market volatility by tapping into a basket of securities that is slightly more volatile than the overall market. 

“When the market goes down, volatility goes up and option premiums go up,” he said. “In a flat market, this strategy also works out great because we’re selling upside.” 

Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter