The first half of 2023 is in the books, and it’s been a pretty good year for the JPMorgan Equity Prime Income ETF (NYSEARCA: JEPI). The ETF, which has a dividend yield of just over 10%, saw net inflows of $10 billion (as of the end of June), more than all but two other ETFs, the huge Vanguard S&P 500 ETF and the iShares 20+ Year Treasury. Bond ETF, which is quite a feat considering the ubiquity of these passive ETFs.
Not only that, but the inflows increased JEPI’s assets under management to $28 billion, meaning it overtook the JPMorgan UltraShort Income ETF as the largest actively managed ETF in the world.
JEPI’s speed of rise in the ETF rankings has been remarkable, considering that the ETF only launched in May 2020.
Now let’s take a look at what JEPI is, what’s driving its growing popularity, and how it can fit into your portfolio.
Why is JEPI so popular?
What’s Behind JEPI’s Rapid Rise in the ETF Rankings? Look no further than its double-digit dividend yield, which is currently just over 10%, as mentioned earlier. In a world where retirees and other income-oriented investors are looking to generate more income, this double-digit return is attractive. This return outperforms the broader market, where the average return for the S&P 500 is just 1.5%.
It is also significantly higher than the 3.94% risk-free return that investors can earn from 10-year Treasury bills. Moreover, it is well above the rate of inflation, which has cooled since its peak, but still stood at 4% in May. Not only does JEPI have a stunning yield, but it pays its dividend on a monthly basis, which makes it even more attractive to investors looking for a reliable and frequent stream of passive income.
How does JEPI invest?
According to fund sponsor JPMorgan, JEPI “generates income through a combination of options writing and investing in large-cap US stocks, seeking to generate a monthly income stream from associated options premiums and stock dividends”. Through this strategy, JEPI also attempts to “deliver a significant portion of the returns” of the S&P 500 with less volatility.
Blue-chip diversified holdings
JEPI currently holds 118 positions. The fund is extremely diversified as its top 10 holdings represent only 17.5% of assets. This reduces the risk of being overexposed to just a handful of stocks. JEPI’s largest holding, Adobe, represents less than 2% of assets.
Below is an overview of the top 10 JEPI stocks using TipRanks’ stocks tool.
JEPI’s top holdings are a mix of high-flying tech stocks like Adobe, Amazon and Microsoft paired with reliable, long-time dividend payers like Pepsico and Hershey. What they have in common is that they are all large cap US stocks, and most investors would consider many of them blue chip names.
The inclusion of growth stocks like Adobe and Amazon may seem unusual because they are not dividend-paying stocks, but since JEPI sells covered calls (an options strategy) to generate income, all stocks it holds are not necessarily dividend-paying shares.
Is JEPI a buy, according to analysts?
When it comes to Wall Street, JEPI has a moderate buy consensus rating, as 68.32% of analyst ratings are buys, 29.01% are holds, and 2.67% are sells. At $60.52, JEPI’s average stock price target implies approximately 11% upside potential.
Take a look at its performance
JEPI hasn’t been around for long, so we can’t track its performance for a decade or more. However, it has now been around for three years and, at the end of May, had a respectable annualized total return of 11.6% over the past three years.
Assessment of potential trade-offs
One factor investors should consider when considering an investment in JEPI is the potential trade-off that accompanies its high dividend yield. Many analysts and observers have noted that by selling covered calls, JEPI runs the risk of leaving the upside on the table as the market rises.
You can see that concern in effect this year – while JEPI’s total return of 5.6% year-to-date isn’t bad, it’s significantly lagging the S&P 500, which is up 16.5% over the same period. The Nasdaq is up even more, with a 33% gain so far in 2023.
On the other hand, remember that part of JEPI’s strategy is to reduce volatility. To JEPI’s credit, in last year’s more turbulent market, its total return of -3.5% was significantly better than those of the S&P 500 and Nasdaq, which fell 19.6% and 33% respectively. 5% for the year. This relatively strong performance in 2022 appears to validate JEPI’s strategy as a way to reduce volatility and add downside protection.
So over the past two years, JEPI has outperformed the market during tough times and lagged the market during good times while continuing to deliver double-digit annualized returns and paying its investors a monthly dividend. , which pretty much sums up its value proposition to investors.
For investors who understand this dynamic and accept the idea of likely sacrificing long-term capital appreciation in exchange for some stability and downside protection (plus a monthly dividend), JEPI seems like an appropriate ETF. to own. Moreover, given the rapid rise of JEPI, there are apparently plenty of investors who are happy to take this approach.
In a recent discussion with the FinancialTimesJPMorgan’s global head of ETF solutions, Byron Lake, explained that “we have fewer conversations around [returns] compared to the benchmark and more conversations about what clients are trying to accomplish”, which could be “a good quality of life in retirement”.
In the long run, it has always paid off to have exposure to the long-term upside of the market, so while I wouldn’t make JEPI my biggest holding (or only holding, for that matter), I like the idea of using it as part of a well-balanced portfolio that will provide monthly income with an above-average return as well as returns that are less correlated with the market in general.