JPMorgan Equity Premium Income ETF Buy Thesis
I recently initiated a position in the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) for the quality high-yield income portfolio of my Seeking Alpha Marketplace Service. The high-yield income portfolio targets 12% and presently yields 11.99%.
According to JPMorgan, JEPI is designed to provide high-yield income coupled with the opportunity for capital appreciation. This is the exact focus of my service. We seek to provide high-yield income coupled with the opportunity for solid capital appreciation. We target a 20% total return with 10% coming from dividend payouts and 10% from capital appreciation. JEPI fits the bill. Below is the detailed approach of the ETF as described by JPMorgan.
The Approach per JPMorgan:
- Generates income through a combination of selling options and investing in U.S. large cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends
- Constructs a diversified, low volatility equity portfolio through a proprietary research process designed to identify over- and undervalued stocks with attractive risk/return characteristics
- Seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income
In the following sections, we dig into the details regarding JPMorgan's actively managed equity and covered call ETF. Let's get started.
JEPI Overview
JEPI is a well-diversified equity and covered call ETF. It does not require a K1. You can review all of the facets of the ETF in detail on JPMorgan's JEPI webpage here. In the following sections, we will cover the highlights. Below is a list of the ETF's strategies and objectives.
JEPI detailed strategies and objectives
The primary objective of the portfolio is to provide high-yield income with reduced volatility. This is achieved by having a well-diversified portfolio of high-yield holdings from various sectors coupled with a covered call options strategy. The covered call options strategy is utilized to bolster the yield by increasing the payout while simultaneously lowering volatility. The two co-managers of the portfolio have over 60 years of experience.
JEPI Portfolio managers
In today's market running an actively managed ETF is an incredibly difficult and arduous task. I do not envy them. Yet, they have done a smashing job to date. JEPI ranks second in the top ten actively managed ETFs based on assets under management.
Top Ten Actively Managed ETFs based on AUM
Let's start off with the deep dive into the dividend metrics since this is the primary reason we are all here.
Seeking Alpha dividend summary
The current trailing yield is a healthy 11.45%. Yet, JEPI actually pays a variable rate monthly distribution so we need to look at it from both a trailing and forward basis. According to JPMorgan, the forward yield is 12.51% as of 12/31/2022. This is substantially higher than all other high yield assets class. See the graphic below.
JEPI dividend yield comparison
As you can see, you definitely get the most bang for your buck with JEPI. Nevertheless, does that come with increased risk? Let's dig a little deeper and see what Seeking Alpha's Quantitative Analysis has to say about JEPI, shall we?
Seeking Alpha Quant Dividend Grade A+
I love Seeking Alpha's quantitative analytics platform. It's a great way to get an unbiased perspective regarding the empirical data. Further, it crutches the numbers in various ways to give you a more comprehensive picture of the actual results. Seeking Alpha's quantitative analytics scores JEPI as an A+ for having an above par yield, growth rate, and consecutive years of dividend growth. The ETF has been increasing the dividend at a substantial CAGR of over 50% which is 325% higher than the median growth rate of 12.42% for all other equity ETFs. Keep in mind this has only been for two years as JEPI was launched in May 2020. See the chart below.
JEPI dividend growth rate
The distribution growing substantially coupled with the price of shares dropping somewhat has caused the yield to increase substantially over the past 3 years.
Dividend Yield since inception
The yield has continued to climb for the past 3 years. The ETF has an outstanding quant rating for risk as well. Let's take a look at why.
Seeking Alpha Quantitative Risk Grade A
All four primary underlying risk metrics are substantially outperforming those of their peers. It has low short interest, trades with much less volatility, is highly diversified, and is currently returning very close to its normalized historical returns (Standard Deviation). This means it's not an "accidental" high yielder. Which usually means there is some big problem lurking in the background. Now let's take a look at which equities are the primary holdings of JEPI. Below are JEPI's top ten holdings.
Top 10 Holdings
I like all of these picks. They are a highly diversified panoply of solid companies that provides exposure to several different sectors. One additional point I'd like to make is the fact the portfolio is very highly diversified. If you notice, the top ten holdings only make up approximately 15% of the total portfolio allocation at about 1.5% each. Often times you will see some major allocations in the top ten holdings of 50% or greater. I like the additional diversity. It's an easy way to gain diversification in one fell swoop, reducing risk substantially. Now, let's take a look at the sector breakdown and portfolio metrics.
Sector breakdown & Portfolio analysis
JEPI has a somewhat higher average P/E ratio than the market writ large. This causes my risk management ears to perk up bit. Now is the time to be holding securities with high P/E ratios as we may be entering a time of multiple compression based on reduced earnings potential. Yet, the 0.62 beta (1-year) calms my nerves somewhat. This low beta means the ETF is much less volatile than the market on the whole. Moreover, in addition to investing in individual equities, JEPI employs a disciplined options overlay strategy by implementing an out-of-the-money S&P 500 Index call options tactic. This is employed to generate additional distributable monthly income. The covered call options strategy combined with the ETF's solid performance since inception helps me to sleep very well at night. What's more, JEPI is trading on par with NAV.
JEPI NAV vs Market price
I had to look twice because it looked like the chart was only showing the market price. Yet, it's actually just an optical illusion due to the fact they are in a highly correlated lockstep. It may be because my eyes are getting old as well, don't tell anyone. The long and short of it is most ETFs' current market prices are highly correlated to their NAVs. Actively trades equity ETFs are dissimilar to CEFs or BDCs which can trade vastly higher or lower than their NAVs over time, so it's nothing to get really excited about. Below are the current major attributes of the ETF. The expense ratio is 0.35%.
JEPI ETF metrics as of 1/19/2023
The current expenses are 0.35%. The ETF is trading essentially bang on par with its NAV. The 30-day SEC yield is 11.77% presently. This is a yield calculation developed by the SEC, so prospective purchasers can compare various ETF yields that pay at differing intervals. The 30-day SEC yield reflects the dividends and interest earned during the most recent 30 day period after deducting expenses. The 30-day SEC yield is calculated by dividing the net investment income per share earned during the previous period by the maximum offering price per share on the last day of that period. Just thought I'd be sure and explain that prior to getting a bunch of questions from readers as to why it's different. Now let's wrap this up.
Investor Takeaway
I have to thank a couple of current members of my Seeking Alpha Marketplace service Mickeystoysz16 and LastJedi for bringing this security to my attention. That is what is so great about being part of group of like-minded investors and retirees. JEPI is a highly diversified, low volatility, monthly paying, high yield gem hiding in plain sight. I don't usually share my selections with the public. Yet, I have such high conviction regarding JEPI, I felt the need to do a public article on it. I felt obligated to share it with all my followers and Seeking Alpha members writ large.
One thing to remember
The uncertainty of the current macroeconomic and geopolitical state of affairs is very high presently. Anything can happen with visibility so low. What's more, almost everyone has jumped aboard the "first half recession" boat at this time. What I've found from my 30 years in the market is that usually means the boat is most likely going to capsize. When "group think" takes hold, things never seem to turn out the way most think.
Nonetheless, JEPI looks like one of the best risk/reward 12% yielding opportunities out there. It's my top highest conviction quality high-yield income selection for 2023. Even so, I would definitely layer in using several tranches and build the position slowly to reduce risk even further. I got burned too many times as a young buck plunking down my entire allocation right off the bat. I hope you enjoyed the review. Those are my thoughts on the matter. I look forward to reading yours. I find that the most valuable information is more often than not provided by the prescient Seeking Alpha members in the comments section.
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