Shrinking Monthly Paychecks From Popular JEPI, What You Need To Know (NYSEARCA:JEPI) (2024)

Are you looking for some income monthly from an exchange-traded fund, or ETF, that moves largely in tandem with the market but also offers bountiful income? Well, we have previously covered a very stable and conservative ETF in the Schwab US Dividend ETF (SCHD). We also covered the more risky PIMCO Dynamic Income Fund (PDI), but downgraded that to hold on price action as an option to consider on a pullback for income. But less conservative than SCHD and more so than PDI is the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI).

Now, we would not dive right in here heavy with markets at these highs. It is prudent to wait for some market weakness, and then pick your spots. Make no mistake, we will get some sort of correction, even if it is seasonal in nature, later this summer, and you will see a better price. This is something most new investors do wrong. They think they need time in the market period and that is it. While that is largely true long-term, make no mistake, your returns are magnified when you average into investments on weakness. Unless you are dollar cost averaging every single week or two, strongly consider legging into your investments on some weakness.

Now, as an income name, and one that pays monthly, we like that this ETF is really range bound over the last few years and has been sideways that last few months. The range bound nature helps with you being able to pick up dips when the price falls toward the lower end of the trading channel. Now, we will also say that although this ETF is pretty diversified, we still think income investors should spread their money out to multiple ETFs and or high-quality dividend paying stocks. For those that are earlier in their investing careers, a blend of income and growth is suggested.

Here, there is potential for growth, but the ETF has not really run up with the market. But it has been stable, and that is good for monthly income collection without on-paper principal getting whacked. And when we suggest an income name for our traders to park some principal and collect some cash flow, we are constantly looking for reliable income. While the price is relatively stable in this calm market, the one thing that may be unattractive to many is that JEPI does have a fluctuating payout. This is problematic if you are trying to project income, especially for retirees who may really heavily rely on it. Not knowing what you will be paid may mean that many potential buyers will pass over this ETF.

So how does the ETF operate? Well, JEPI does a pretty nice job of generating income through employing a call option approach. The fund's managers segment off call options within the portfolio, and also sell calls that are out of the money. Now, what you should be aware of here is that the operational approach to the ETF is to have most of the assets (about 80%) in equities, while the other 20% or so of assets allocated toward generating income, and not just through options but also through what are known as equity-linked notes.

Now, we won't go into a ton of detail here about this, but equity-linked notes are essentially structured instruments that from a simple perspective blend the features of both fixed-income securities and equities. So, there are potential for gains here linked to the performance of the underlying equities or equity indices the fund is exposed to, but also offer income through coupon payments. This topic may be foreign to some readers, so to learn more on the equity-linked assets and risks, this resource here is a good starting place.

Now, this is not just a covered call option ETF. That is, it does not simply only write covered calls against the actual equity positions, but EPI also generates income flow from the premiums on the call options that the linked notes write. This differentiates it a bit from other covered call ETFs. And of course, some 80% equity portion of JEPI's portfolio is uncapped, so it should move up (or down) with the market. And you do see JEPI's chart has some correlation to the overall market, but with less percentage moves higher and lower, generally speaking.

For those curious, here is the most updated complete set of holdings below:

These are the holdings as of the close Friday, June 21, 2024. You should be able to scroll to the right on this table to see more details. JEPI has made a run, but the market is at or very near all-time highs despite a slight breather. The ETF value has not kept pace overall, despite the roughly 80% of the fund in equities that should move more tightly with the market. So there is, in our opinion, some underperformance in the price action. But again, for income investors, the principal being up is always positive, and when it inevitably has another dip, new money can consider coming in.

Now keep in mind, that as a big income-paying name, your entire initial investment can be recouped from this income alone, and then everything on top of that is gravy. Now again, the dividend fluctuates based on moves in the underlying stocks, the premiums collected from calls, etc.

Assuming that hypothetically the price of the ETF never appreciated or depreciated, your entire investment would be recouped in about 13 years of dividends, assuming an annual payout around $4.30 a year. After that, the rest is all "free" money. These would all be gains essentially after year 13, assuming even if the ETF went to zero. Unlike a single stock which can go to zero, JEPI is a basket of holdings, and should never go belly up. There is just too much diversification, of course. It could drastically underperform, but should not go bankrupt.

There are some unique risks with the equity linked notes and the contract deliverables that one can make arguments about, but when the top 10 holdings are in Microsoft (MSFT), Amazon (AMZN), Meta (META) etc., you just are not going to lose substantial principal here. Also, since there is income being generated here from selling option premia, the level of that income depends on movements in rates, and volatility. In this low volatility environment, and mixed back and forth of rates, option premium income has been mixed.

That said, this ETF has paid nearly $20 in distributions since inception, and the JEPI ETF is up some 20%. Translation? There have been solid total returns.

So this is what you need to know. The fact is that the distributions are going to fluctuate based on the equity movements and option income. When reviewing the holdings above in the table, it remains clear that the portfolio is still very much quality-oriented, with many lower-beta names versus some of the many other call option selling income ETFs we have looked at. That said, with lower volatility the price of options has come down so you are seeing lower premium from selling options. This explains in large part lower distributions when looking at the payout history:

So, as you can see, the payouts have been trailing lower the past two years, as volatility has been so tame for many months. But when it ticks up, income from selling option premia will increase. In this market, when selling covered calls, the portfolio can lose out if the underlying assets run up above the covered call ceiling and get called away. Then the fund has to buy back the stock and sell more calls, or roll them out. Since the fund sells out-of-the-money call options, there is flexibility, but with the market run up the last few months, a lot of maneuvering has likely had to be conducted as some of the holdings have run up.

Final thoughts

As designed, the JEPI ETF is doing its job well. There is a solid monthly income here. When volatility picks up again, we would expect higher distributions being likely, while the price of the ETF will be pressured with the market, whenever the next selloff is.

That said, JEPI has not been keeping a perfect pace with market movements. Still, depending on the price of the ETF and the amount of income generated by the portfolio, you should be collecting somewhere between a 7% and 10% yield. It fluctuates. That changing payout may make it unattractive to those who rely on consistent income, but if you can stomach the variable payout, this is an excellent choice for monthly income to add to your arsenal, along with other income producing holdings.

As always, we would never invest most or all of our assets in any one instrument, but this one is a decent addition to consider. Overall, the JPMorgan Equity Premium Income ETF deserves your consideration for income. Take advantage of dips here, or buy regularly every few weeks to dollar cost average.

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