JEPI: Equity Dividend Yield On Steroids

As of twentieth August 2023, the U.S. 10 year treasury yield trades at roughly 4.25%, as in comparison with a dividend yield of ~1.5-1.6% for the S&P 500 (SP500). Furthermore, even income-focused ETFs similar to the favored Schwab U.S. Dividend Fairness ETF (SCHD) presently fail to ship a treasury-competitive yield.

The JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) is particular on the planet of equities, because the fund goals to generate earnings by way of dividends, whereas promoting equity-linked notes on the portfolio. In that context, promoting equity-linked notes could be greatest understood as writing name choices on the S&P benchmark, thereby decreasing portfolio delta and amassing a premium. If historic efficiency is a information for future expectations, then traders might fairly anticipate that the JEPI portfolio technique will ship a 11th of September% annual earnings, whereas defending the notional capital base.

With that body of reference, though the under chart is a bit outdated, the graphic nonetheless provides a great comparability of JEPI’s distributable earnings vs. main asset lessons, highlighting a extremely enticing worth proposition of JEPI for dividend-focused traders.

General, I proceed to charge JEPI a “Sturdy Purchase”. According to my initiation protection in October 2022, I proceed to love JEPI’s low-beta and short-duration funding technique, which leverages fairness volatility to generate returns. In that context, traders ought to be aware of the renewed, steadily upticking VIX, in addition to a web “Brief Gamma” positioning of possibility sellers and merchants for the primary time in 2023.

Defensive Portfolio Asset Allocation

The primary argument I want to spotlight in context of why JEPI is such an ideal possibility for income-focused traders is said to the fund’s defensive asset allocation: As in comparison with the S&P 500, with the 1x Beta benchmark, JEPI’s 1-year Beta is simply 0.64; respectively, versus the S&P 500’s 19% 1-year return normal deviation, JEPI’s comparable metric is simply 13.3%. According to the decrease portfolio volatility, JEPI calls for a P/E premium vs. the S&P 500; nevertheless, the premium could be very manageable with solely 20.5x P/E vs. 19.7x for the S&P 500.

Evaluating JEPI towards the S&P 500, there’s one further knowledge level that I want to spotlight, which is development. Referencing JEPI’s low portfolio volatility vs. the S&P 500, an investor would seemingly anticipate that the expansion in JEPI’s underlyings is low. However this isn’t the case: For the trailing twelve months, JEPI’s EPS development on a portfolio degree was 10.5%, as in comparison with solely 9.9% for the S&P 500.

To sum it up, towards the S&P 500, JEPI presents traders (i) decrease portfolio Beta, (ii) decrease portfolio volatility and (iii) greater earnings development, whereas demanding solely a barely costlier P/E.

To attain JEPI’s low portfolio volatility ranges, the fund anchors on a well-diversified asset allocation method, paired with bottom-up elementary analysis on single firm. On a sector degree: about 13% is invested in Data Expertise, 12.9% is in Financials, 12.1% is in Well being Care, 11.5% is in Industrials, and about 11.2% is in Client Staples — with the rest balanced on different sectors. On a extra granular degree, traders will word that no single identify inventory touches the two% benchmark. And the allocation distinction of the portfolio’s prime 1 holding vs. the highest 10 holding (all blue chip corporations) is simply 27 foundation factors.

Volatility – The Revenue Steroid

Paired with a powerful fairness choice course of, the technique of promoting volatility to hedge portfolio Delta whereas amassing an option-premium price is what makes JEPI so particular. Or as communicated by the very fact sheet:

[JEPI] generates earnings by way of a mixture of promoting choices and investing in U.S. giant cap shares, in search of to ship a month-to-month earnings stream from related possibility premiums and inventory dividends

Accordingly, the upper the market volatility, the upper the VIX/ implied volatility expectations, and the upper the decision writing premium for JEPI. So, whereas most fairness traders worry and hate volatility, JEPI homeowners thrive on it.

With that body of reference, the CBOE Volatility Index serves as a device for assessing traders’ anticipations concerning the extent of volatility within the equities market over 30-day span. To place it extra pragmatically, when there’s a surge within the VIX, it alerts a rise in uncertainty and sure market turmoil; whereas a contracting VIX alerts simply the other.

Speaking concerning the VIX, it is value highlighting that the VIX has been constantly lowering year-to-date, with a probable low in early summer season of 2023. Notably, the period of this declining development within the VIX coincided with a constant upward development within the worth of equities. Now, nevertheless, volatility is slowly selecting up — benefitting JEPI’s overwrite technique.

In a current article on the VIX, I’ve given perception that possibility sellers and merchants at the moment are “Brief” on Gamma for the primary time in 2023. Whereas a extra detailed rationalization on Gamma could be discovered right here, the important thing takeaway that traders ought to think about is that “Brief” Gamma positions can provoke a “volatility suggestions”, contributing to increasing market volatility.

Dangers

Typically talking, JEPI reduces investor threat by way of promoting possibility premium. That mentioned, nevertheless, there are two main threat issues that I want to spotlight and briefly focus on. First, it is essential for traders to know that the JPMorgan Fairness Premium Revenue ETF is an equities fund. Accordingly, despite the fact that the asset allocation is defensive, the ETF’s efficiency may nonetheless be affected by (typical) sudden inventory costs fluctuations. Second, if an investor is focusing extra on development, and fewer on earnings, then JEPI may not be the only option. I see two essential causes for it: A) The ETF limits how a lot it might probably acquire when the inventory market is doing very well, as a result of the “Brief volatility” technique sells upside by way of writing name choices; B) The ETF places cash into shares that are usually extra steady and do higher when the financial system is not doing so nice. Thus, in a really bullish market, JEPI’s defensive technique might seemingly underperform the S&P 500.

Sturdy Purchase

The JPMorgan Fairness Premium Revenue ETF outshines income-focused ETFs such because the SCHD; and even outshines the 10-year treasury yield. Reflecting on the present macro-environment, which factors to a probable pick-up in volatility for the rest of 2023, I like JEPI’s low-beta and short-duration funding technique, which really advantages from volatility growth.

On the backdrop of JEPI’s call-overwrite technique, I’d anticipate to obtain a 11th of September% annual earnings yield from the fund, with little draw back (but additionally upside) to the capital base. Buyers may additionally recognize that the JEPI is a comparatively low-cost ETF, with web bills as little as 0.35% per 12 months.

General, I charge JEPI a “Sturdy Purchase”.