Income investing is INVESTING. Everything else is speculation.
I’m always vetting the landscape for new income investments.
I’m old school in this regard.
A new income investment has caught my attention. It appears to have caught a lot of investors’ attention.
The JPMorgan Equity Premium Income ETF (NYSEArca: JEPI) is one of the most successful actively-managed ETFs in recent memory.
JPMorgan launched its eponymous ETF in May 2020. It has been onward and upward since.
Indeed, the JEPI ETF gathered more assets last year than any other fund investment. The JEPI ETF holds about $28 billion in assets today
As a point of reference, Cathie Wood’s flagship ARK Innovation ETF (NYSEArca: ARKK) had been the most successful actively ETF.
At its peak, in January 2021, Wood’s fund held $28 billion of assets. The ARK Innovation ETF has shrunk to $8 billion since.
So, what’s the attraction?
Income, and a lot of it.
The JEPI ETF has consistently yielded above 10% since its launch three years ago. It yields 10.9% as I write.
Payment frequency is another attraction. The JEPI ETF pays monthly dividends.
The novel strategy employed to generate the high yield income is another draw.
The strategy is difficult for most individual income investors to replicate.
The JEPI ETF invests in equity-linked notes (ELNs) – debt instruments linked to an investment or a particular strategy. The ELNs used by the JEPI ETF mimic the return of an S&P 500 covered-call strategy.
The JEPI ETF will allocate up 20% of its net assets in these ELNs. The rest is allocated to low-volatility (mostly value) stocks culled from the S&P 500.
The high-yield income arises from option premiums collected and dividends received.
Investors are attracted to share-price stability.
The JEPI ETF finished down 3.5% after the market sell-off in 2022. The S&P 500 finished down 18.1%.
Investors pay only a pittance for active management.
Actively managed ETFs are generally more expensive than index-directed, passive ETFs.
The JEPI ETF is managed on the cheap.
Its expense ratio is only 0.35%. The ARK Innovation is also actively managed. Its expense ratio is 0.75%.
Good, but imperfect.
The JEPI ETF gives you impressive income, but it comes at a price.
Capped price appreciation is the primary price paid for the high-yield income. The JEPI ETF is flat through the first half of 2023, while the S&P 500 is up nearly 15%.
The monthly dividends are irregular. They vary month to month, and sometimes considerably.
The reported yield is the product of the previous 12-months of dividend payments. It’s no guarantee of a yield for the next 12 months.
When everyone runs in one direction, my instincts compel me to run in the opposite direction.
But not this time.
I like the JEPI ETF for the niche it serves – to provide high-yield income paid in monthly installments over time.
Yes, you’re forfeiting price appreciation, but that’s OK.
You can mint meaningful wealth reinvesting the dividends of an investment yielding 10.9% in additional shares of that same investment.
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Disclosure: I own shares of the JEPI ETF.