An equity ETF with income as the outcome

Financial Newswire Contributor

1 December 2022

A rising interest rate environment is prompting investors to rethink their income approaches. But market volatility, persistent inflation and an uncertain economic outlook bring a new set of challenges.

The new, actively managed JPMorgan Equity Premium Income ETF (JEPI)1 seeks to resolve the dilemma by pursuing opportunities for capital appreciation and consistent monthly income, with lower volatility than the U.S. stock market.

The launch of JEPI brings the fastest active ETF to reach USD13 billion2 to the Australian market. JEPI is a feeder ETF into the US Master Fund, which was launched in the US in May 2020 and currently ranks number one for flows into active ETFs year to date with USD3.5 billion in net new assets in Q3 alone2.

The fund seeks total returns from three avenues: dividends, options premium and potential capital appreciation. These return streams are generated through the combination of a defensive underlying equity portfolio and an options overlay.

By investing conservatively in a well-diversified, long-only portfolio of high-quality U.S. companies, the managers seek to manage downside risks when equity markets fall. To identify these companies, JEPI leverages a time-tested, 30+ year investment philosophy and process, with stock selection based on in-house risk-adjusted stock rankings.

The innovative options overlay allows the managers to balance total return and income generation. One-month, out-of-the-money call options are used to generate
income and give investors opportunities to participate in market upside. The options premium generated can vary depending on market volatility: as volatility increases, the potential for incremental income and upside also increases.

With JEPI, income is the outcome we seek. While it is not expected to outperform the total return of the S&P 500 through a market cycle (defined as a full up and down market), its primary goal is to seek consistent opportunities for annualised income, distributed monthly, with about two-thirds of the volatility of the S&P 500 Index. We believe this presents a better risk-adjusted return over the cycle. By exposing the portfolio to lower-than-market risk and generating income, JEPI forgoes some of the market’s upside over time.

JEPI’s income is derived from both dividend and options premium – an innovative approach that aims to produce a consistent monthly income stream, although this is not guaranteed.

As a result, JEPI has the potential to serve as the cornerstone to an income portfolio, or to diversify existing income strategies and reduce exposure to asset classes that may be more vulnerable to credit, duration or interest rate risks.

Investors may also use the strategy as a conservative way to access the U.S. equity market, given that dividends represent an important part of total return, especially in falling markets.

While many income strategies set a target distribution that is paid out regardless of the income generated through changing investment environments, JEPI aims to pay out all the income the portfolio makes on a monthly basis, net of fees.

JEPI – an intelligent income strategy to help navigate an inflationary world.

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1 JPMorgan Equity Premium Income (JEPI) is the marketing name of the JPMorgan Equity Premium Income Active ETF (Managed Fund).
2 Source: Bloomberg as at 25 October 2022.

The information is general in nature and does not take into account any specific investor’s objectives or circumstance. Provided to illustrate macro trends and JPMAM’s income investing capabilities. Returns, income or dividends are not guaranteed. The manager seeks to achieve its stated objectives, there is no guarantee they will be met. Forecasts and estimates may or may not come to pass. Investments involve risks and are not similar or comparable to deposits. Not all investments are suitable for all investors. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant Product Disclosure Statement (PDS) and Target Market Determination, which are available to download on our website, am.jpmorgan.com/au and make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.