How JEPI is Disrupting the Equity Income Market and Outperforming Passive ETFs

Dividends have long been a major component of portfolios since the birth of the stock market. People often forget that when you buy a stock, you are taking ownership in a company and you’re entitled to a share of its profits. As such, dividend ETFs have long existed and today feature billions in assets. For example, Vanguard Dividend Appreciation ETF (VIG) holds nearly $75 billion in assets, while the iShares Select Dividend ETF (DVY) holds nearly $23 billion.

But an upstart fund may be eating these classic dividend ETFs’ lunches. JEPI has quickly gathered assets and has started to outperform these funds in a big way.

The fund launched in 2020 and had just $173 million in assets after its first year. However, since then, assets in the fund have exploded, surging by more than $5 billion during the first quarter alone. Today, JEPI has assets north of $25 billion. This has allowed it to take the crown for the largest active ETF from its sister fund, the JPMorgan Ultra-Short Income ETF (JPST).

And it’s easy to see why the fund has gathered so many assets. JEPI currently offers a monster yield of 9.79% that is paid monthly. This compares to just a 1.84% yield for the previously mentioned VIG. JEPI’s yield is more than double DVY’s payout as well. Same could be said for the uber-popular Schwab US Dividend Equity ETF (SCHD).

Additionally, JEPI has managed to outperform its passive rivals, underscoring how dividends can be a key component to total return. For the most part, dividend-focused ETFs have been in the red this year as the Fed has continued to raise rates. With cash and short-term bonds now yielding close to 5%, investors have sold equities and moved into safer assets. However, JEPI has returned nearly 9% this year, more than beating the average 3% loss for the category. Even among those dividend ETFs that have shown strong gains, JEPI has beaten them by roughly 1 to 2 percentage points year-to-date.

The secret to JEPI’s strong yield and its outperformance has to do with its active management and twist on the sector.

The fund’s core is built on dividend stocks in the S&P 500. JPM’s managers dig through the parent index to find those stocks that are undervalued and exhibit lower volatility than the broader market. This alone provides high yields and provides less ‘bounciness’ to its holdings.

JEPI could stop right there and have a pretty good active ETF. The actively managed T. Rowe Price Equity Income ETF (TEQI) basically does this and has been able to stem much of the losses seen by its passive rivals.

However, JEPI’s lower volatility and cheap price come into play in the second part of its strategy, whereby it writes covered calls and uses an option overlay on these stocks. Writing call options can be a great way to generate extra income as investors are paid a premium for writing the option. The downside is if the stock surges and the option is exercised, investors cap their gain potential. But since JEPI focuses on those stocks with low volatility and writes out-of-money call options, it’s able to produce meaningful extra income over and over.

The combination is unique and only available via active management.

Given JEPI’s high yield and better performance, could the active ETF fit in your portfolio? The answer is yes, with a few caveats.

The fund does make for a wonderful monthly dividend machine for income seekers and could be a great way to expand a fixed income portfolio. However, there are some things to remember with the fund. The reason why JEPI’s option outlay is working so well right now is the current market environment is perfect for options writing. Stocks have been listless with the Fed tinkering with rates. Without direction, investors can gather premiums from the calls while still holding the underlying stocks to keep the options writing going.

In a surging market—like the one the precluded this one—option strategies significantly under-performed. It’s better just to hold the stock and ride the full capital gains. While it’s hard to judge when the market will turn direction, eventually it will. That could hinder JEPI’s ability to win.

Another issue: size of the fund. When specialized funds get too big, they tend to lose some of their special sauce. It’s harder to make good bets of size. Moreover, investors are able to front run and predict what managers will buy and do. Since it’s a fully transparent ETF, JEPI’s holdings are well known. If it gets too big, JEPI may not be able to keep the gains going over the long haul.

So, what to do? Perhaps pair JEPI with one of the more traditional passive dividend ETFs. The combination should provide a one-two punch of strong yield generation today and growth for the long haul.

Options income funds offer a unique twist in the current market and the JPMorgan Equity Premium Income ETF seems to be the top dog. With a performance that continues to beat both passive and active rivals in the options overlay space, the fund should continue to gather assets and reward investors. The key to its outperformance could be JPM’s top management team and expertise in the space. And that’s exactly why you choose an active manager.

However, investors still need to be cautious when using a fund like this as much of its strong ability to win comes from market environment. Ultimately, pairing the fund with one of its traditional dividend-index passive rivals could be the best bet.