JEPI Stock - JPMorgan Equity Premium Income ETF (2024)

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Morningstar’s Analysis JEPI

Medalist rating as of .

Solid approach to covered calls still carries long-term costs.

Our research team assigns Bronze ratings to strategies they’re confident will outperform a relevant index, or most peers, over a market cycle on a risk-adjusted basis.

  • Process Pillar

    Above Average

  • People Pillar

    Above Average

  • Parent Pillar

    Above Average

JEPI Stock - JPMorgan Equity Premium Income ETF (1)

Lan Anh Tran

Analyst

Summary

J.P. Morgan Equity Premium income takes a nuanced approach to covered calls that delivers high income while reducing downside risk. This fund’s incremental improvements on a basic covered-call strategy make it a solid option in the derivative income Morningstar Category, though income from covered calls generally isn’t tax-efficient.

This fund owns a defensive equity portfolio that targets a low beta to the S&P 500 while systematically selling one-month call options on the index. The manager trades the options in weekly tranches to reduce path dependency and targets 30-delta out-of-the-money calls to capture a modest amount of the index’s upside in addition to collecting the options premium. The fund uses equity-linked notes, or ELNs, that mimic the profits from writing call options instead of shorting the options themselves. ELNs carry additional counterparty risk, but the team at J.P. Morgan diversifies counterparties and only transacts with global financial institutions that pass their regular counterparty risk monitoring. Tax treatment of ELNs is often favorable for capital gains on equity returns but can be disadvantageous for options profits. Investors in the highest tax brackets may prefer to pick a more tax-aware fund. However, the fund’s total distribution often ranks in the top quintile of its category, which should keep its aftertax income attractive for investors in lower tax brackets.

In general, covered-call funds have not been the best buy-and-hold investments for investors with a longer time horizon. The equity portfolio’s upside is capped, and the downside remains exposed to significant drawdowns, which will likely erode an investor’s long-term total returns. Even for investors with high-income needs, there may be more-tax-efficient options available. However, covered-call funds provide a simpler way to outsource this task and can alleviate problems that come with self-implementation.

This fund’s high payouts, reduced path dependency, and lower-risk equity portfolio work to its advantage compared with category rivals. Its underlying index, the S&P 500, is also a reasonable choice for a covered-call strategy. The S&P 500 has enough upside and options liquidity to provide harvestable call premiums, while not being overly volatile like some of the indexes used by category peers.

This strategy uses the equity and options sleeves to reduce losses during index drawdowns. Writing call options in down markets can benefit the fund in two ways. First, the premium collected can offset losses to an extent, giving the fund an advantage over the index itself. Second, implied volatility increases during sharp drawdowns, which often translates to higher call premiums. The equity portfolio is also constructed more defensively than the index. It beat the index significantly during the late 2018 selloff and 2022 market meltdown. Shorting call options caps the fund’s upside relative to the S&P 500, but it still kept up with category peers and the category index during recent market rallies. These features contributed to the fund outperforming both the category index and category average since its inception.

by Lan Anh Tran

Rated on Published on

Systematic implementation of the options sleeve fuels this strategy’s high payout, while a defensive equity sleeve lowers its downside risk.

JEPI Stock - JPMorgan Equity Premium Income ETF (2)

Lan Anh Tran

Analyst

Process

Above Average

It earns a Process Pillar rating of Above Average.

This fund combines a systematic approach to selling call options on the S&P 500 with a low-beta equity portfolio. The defensive equity sleeve targets a 0.8 beta to the S&P 500, which results in a beta of 0.6 for the total portfolio with the options overlay. J.P. Morgan industry analysts generate earnings forecasts and valuation rankings for each stock in a broad universe. The manager uses both their quantitative forecasts, to drive selections and weightings, and their qualitative subject matter expertise to contextualize the source of equity risk and market events. No sector can account for more than 17.5% of the portfolio, and no single position can exceed 1.5%, which prevents any single sector or stock from having an outsize impact on volatility.

For the options sleeve, the manager writes one-month, 30-delta out-of-the-money calls, whose strike prices historically fluctuated around 2% above the index price. The options’ strike prices tend to increase further out of the money during periods of heightened volatility, typically during market downturns. The manager staggers the calls in weekly tranches to alleviate the market impact from their options trades and diversify the strike price and call premiums.

The fund packages its calls into an ELN instead of directly shorting the call options. This turns call premiums, which are taxed as capital gains, into interest income, which is taxed as ordinary income. The fund loses the ability to recognize a portion of the premiums as long-term capital gains, whose tax rate is more favorable. However, its higher-than-average payout should compensate for this tax treatment for most investors in lower tax brackets. In addition, this structure avoids the straddle or mixed-straddle tax identification that most peers have. This often results in gains on the equity sleeve being treated as short-term capital gains and precludes equity dividends from a reduced tax rate for qualified dividends. Depending on market conditions, some peers may also have to distribute part of their premiums as return of capital, which is not taxable income but reduces an investor’s cost basis in the fund.

The use of ELNs invites additional counterparty risk. The fund invests around 15% of its assets in ELNs, below the 20% regulatory cap, and spreads its ELNs across four to five issuers to stay under the 5% issuer-level cap. The management team is only allowed to transact with large global financial institutions, typically global systematically important banks, or G-SIBs. They purchase ELNs from issuers offering the best income through a competitive auction process, which should tame the commission spread.

Covered calls effectively cash in on a fixed rate of the index’s upside. These payouts help cushion the strategy’s performance during downturns and add value during sideways markets when the index does not breach its strike price. The defensive equity sleeve should also have shallower drawdowns. However, selling call options caps the strategy’s upside roughly at the strike price of the call plus its premiums. This detracts from performance in market rallies or when lower implied volatility damps call premiums. In addition, its defensive equity sleeve might not keep up with the S&P 500 during rallies. This can cause the fund to underperform a traditional covered-call strategy that simply holds the S&P 500 stocks during up-markets. Staggering the options in weekly tranches can also cause short-term deviations from expectations based on monthly index performance, but this should smooth out over the long run.

This fund’s defensive approach to the equity sleeve tends to underweight mega-cap names and high-growth sectors relative to the S&P 500. It also excludes a sizable number of larger index constituents that it considers too expensive or volatile, instead allocating to smaller companies with reasonable valuations. So far, the equity portfolio has provided protection in most major downturns since the fund’s 2018 inception while moderately keeping up during rallies.

Equity dividends make up a minimal portion of the fund’s payout as the manager doesn’t specifically target dividend-payers. The fund’s annual yield has hovered between 8% and 12% since inception, partly thanks to the recent high-volatility and high-interest-rate environment that pushed premiums up. Income expectations will likely fall lower in the long run but should continue ranking among the highest in the category.

by Lan Anh Tran

Rated on Published on

A duo of industry veterans brings nuanced implementation to this systematic strategy, supported by J.P. Morgan’s broader resources and personnel.

JEPI Stock - JPMorgan Equity Premium Income ETF (3)

Lan Anh Tran

Analyst

People

Above Average

The team earns an Above Average People rating.

Lead portfolio manager and strategy architect Hamilton Reiner joined the firm in 2009 and has three decades of experience in derivatives markets. Prior to joining J.P. Morgan, Reiner held senior positions across Wall Street at Barclays Capital, Lehman Brothers, and Deutsche Bank, and he spent the first 10 years of his career at O’Connor and Associates, an options specialist firm. He is supported by two junior portfolio managers who joined from the ranks of the equity analyst team, and a strong supporting institutional framework at J.P. Morgan.

Raffaele Zingone runs the equity sleeve on this fund, leveraging more than three decades of his equity investing experience. The equity portfolio is the clone of a J.P. Morgan managed volatility separate account that he has long maintained with positive results. He utilizes quantitative forecasts and qualitative industry knowledge from J.P. Morgan’s broad roster of 20-plus equity analysts who average 21 years of industry experience. Consistent with groups this size, there has been modest turnover on the analyst team. Reiner and Zingone both invest more than $1 million alongside investors in both the ETF and mutual vehicles combined, signaling a strong alignment of interest between management and shareholders.

by Lan Anh Tran

Rated on Published on

Building on a solid foundation, J.P. Morgan Asset Management maintains an Above Average Parent rating.

JEPI Stock - JPMorgan Equity Premium Income ETF (4)

Alyssa Stankiewicz

Associate Director

Parent

Above Average

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

by Alyssa Stankiewicz

Rated on Published on

Performance has been in line with expectations.

JEPI Stock - JPMorgan Equity Premium Income ETF (5)

Lan Anh Tran

Analyst

Performance

The fund has outperformed the S&P 500 during major downturns. The I share class beat the S&P 500 by 5.49 and 14.23 percentage points during the selloff in the last quarter of 2018 and the 2022 market meltdown, respectively. On top of the buffer from its call premiums, the fund’s defensive equity sleeve also cushioned the fund. For instance, the equity sleeve outpaced the index by 10.88 percentage points in 2022, an impressive feat even after accounting for its lower beta exposure.

The fund has lagged the S&P 500 during market rallies given its short-call position and defensive equity sleeve. The I share class trailed the index by 21.3 percentage points between March 23, 2020, and Dec. 31, 2020. Similarly, it underperformed the index by 5.27 percentage points during the moderate but persistent growth of the first eight months of 2021.

Nonetheless, the fund provided better performance than its average category peer and category index, the CBOE S&P 500 BuyWrite Index, during these periods. When markets rallied between late March 2020 and December 2020, it outperformed both the category average and category index by 0.21 and 3.36 percentage points, respectively. It generally provided better downside protection than these two benchmarks, save for March 2020 when implied volatility suddenly spiked then dropped.

Overall, this fund’s performance has been solid. From its September 2018 inception through August 2023, the I share class outpaced the category average and index by 3.2 and 4.9 percentage points, respectively.

by Lan Anh Tran

Published on

It’s critical to evaluate expenses, as they come directly out of returns.

JEPI Stock - JPMorgan Equity Premium Income ETF (6)

Lan Anh Tran

Analyst

Price

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Bronze.

by Lan Anh Tran

Published on

Portfolio Holdings JEPI

More JEPI Holdings
  • Current Portfolio Date
  • Equity Holdings
  • Bond Holdings
  • Other Holdings
  • % Assets in Top 10 Holdings 16.1

Top 10 Holdings

% Portfolio Weight

Market ValueUSD

Sector

Microsoft Corp 1.78 596.0 Mil

Technology

Amazon.com Inc 1.74 583.5 Mil

Consumer Cyclical

Meta Platforms Inc Class A 1.70 570.4 Mil

Communication Services

Trane Technologies PLC Class A 1.66 555.1 Mil

Industrials

Progressive Corp 1.64 549.5 Mil

Financial Services

Alphabet Inc Class A 1.60 537.5 Mil

Communication Services

Intuit Inc 1.56 521.7 Mil

Technology

Mastercard Inc Class A 1.48 497.8 Mil

Financial Services

Southern Co 1.47 491.9 Mil

Utilities

NXP Semiconductors NV 1.44 482.3 Mil

Technology

JEPI Stock - JPMorgan Equity Premium Income ETF (2024)
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