With the volatility we have seen over the past couple of years, high-dividend ETFs have become a popular form of investment. At the top of that list is the JPMorgan Equity Premium Income ETF, better known as JEPI. This fund pays out an impressive monthly dividend while providing stability during a turbulent market. But is JEPI a good investment? We looked into it, and here’s what we found.
JEPI can be a good investment, depending on your investment strategy. It suits a certain type of investor who is purely looking for a stream of income. Do not expect much capital appreciation compared to other popular dividend funds.
Investing is such a personal process. Everyone has different investment goals, investment horizons, and personal financial situations. Is JEPI a good investment and more importantly a proper fit for your portfolio? Let’s take a closer look at this ETF and you can see for yourself if it fits into your long-term investment strategy.
What is JEPI ETF?
Let’s start with the basics: what is JEPI? As mentioned, JEPI stands for the JPMorgan Equity Premium Income ETF. This ETF trades on the NYSEARCA exchange and is bought and sold in US dollars. For Canadian investors, consider that you will need to purchase shares in US dollars and will be taxed accordingly for holding foreign investments in a non-registered account. We will go deeper into the tax implications of holding JEPI in a Canadian investing account a little later.
JEPI is a relatively new ETF and has an inception date of May 20, 2020. This ETF also implements the trading of covered calls against its holdings. This is the main mechanism that allows JEPI to provide such a high dividend yield. Covered call ETFs are gaining popularity as well due to their high monthly dividend payouts.
Read here for our article on Covered Call ETFs: High Dividends for Low Growth
Here are some key facts for JEPI as of November 6th, 2023:
|Ticker Symbol||NYSEARCA: JEPI|
|Inception Date||May 20th, 2020|
|ETF Provider||JP Morgan Asset Management|
|Assets Under Management||$29.69 billion USD|
|Management Expense Ratio (MER)||0.35%|
|30-Day SEC Dividend Yield||8.45%|
|Number of Holdings||135|
|1-Year Fund Performance NAV||6.12%|
So far in 2023, JEPI has brought in more than $10 billion in new assets and is set to become one of the top ETFs on the market. In any event, JEPI is already on pace to become the top actively managed ETF in the United States, a position that was previously held by Ark Invest’s Ark Innovation ETF (ARKK).
JEPI MER: High Fees for an Actively Managed Portfolio
One of the most important traits of an ETF to consider is how high its fees are. Why? Because over the long run, these management fees will eat into your gains. The more you have invested in an ETF the higher the fees you will have to pay every year. These fees are referred to as the Management Expense Ratio or MER. How exactly is an MER calculated? We’ll crunch some numbers for the MER of JEPI.
The current MER of JEPI is 0.35%.
What does the MER of 0.35% mean? It means for every $10,000 you invest into JEPI, you will have to pay $35.00 in fees.
You can break this down in any way you would like. For every $1,000 of JEPI you will pay $3.50 and for every $100 of JEPI you will pay $0.35.
Consider the opportunity cost of holding your funds in a covered call ETF. For Canadian investors, writing covered call options at brokerages can add up. So while brokerage fees will come out in the favour of owning JEPI, you will certainly see more capital appreciation by holding positions in the individual stocks.
This is why holding ETFs like JEPI is for investors who are not seeking out large capital appreciation. This makes it an ideal holding for retirement portfolios or as an addition to a dividend-seeking account.
Related Savvy Canadian Finance Article: What is a Cash-Secured Put Strategy?
JEPI Holdings: Blue-Chip Stocks with Covered Call Premiums
As we mentioned, JEPI Is a covered call ETF that writes these options against the stocks that it holds. JEPI is a defensive portfolio that holds 135 different blue-chip stocks that trade on the US markets. Here are the top 10 holdings in JEPI as of November 2023:
|Stock Company Name||Stock Ticker Symbol||Weighted Allocation in JEPI|
|The Progressive Corp||PGR||1.64%|
|Trane Technologies plc||TT||1.54%|
|UnitedHealth Group Inc||UNH||1.47%|
Here is the Sector Exposure for JEPI’s holdings:
|Sector Name||Weighted Allocation in JEPI|
JEPI holds a lot of recognizable names so investors should feel confident in the composition of this ETF. One question you might have is: How does JEPI choose its holdings?
The fund is led by a group of fund managers from JP Morgan, two of which have more than 32 years in the financial sector. They use a time-tested research process that uses a risk-adjusted stock valuation to determine the holdings for JEPI. Adding in the covered calls that are written by the fund managers and you can see why JEPI is considered an actively managed ETF.
JEPI Dividends: High Yield Payments Every Month
The high-yield dividends are usually what attract investors to JEPI in the first place. The allure of the near-10% yield on a monthly basis is a dream for any dividend or income-seeking investor. But beware of things that appear to be too good to be true because they usually are.
JP Morgan has stated that the target yield for JEPI over the long term will settle between 5 and 8%. The 12% yield that had investors interested last year was due to the volatility in the markets. As any options trader knows, the higher the volatility the higher the options premiums. Therefore, JEPI’s yield can be directly correlated to the VIX reading for volatility.
Check out our guide to the Wheel Strategy: Selling Options for Consistent Income
The current 30-day SEC yield for JEPI is a respectable 8.45% which is far above the average yield from the S&P 500 index.
What does an 8.45% yield equate to every month? For November, the dividend payout from JEPI was $0.359 per share.
If you hold 100 shares of JEPI which is about $5,350 at the time of this writing, you would have received $35.90 in dividends for November.
If you hold 1,000 shares of JEPI which is about $53,500 at the time of this writing, you would receive $359.00 in dividends for April.
Historically, the monthly dividend of JEPI has topped out at $0.62 per share and has been as low as $0.25 per share.
What does this tell us about JEPI’s dividends? They will be inconsistent from month to month because of the volatility in options premiums. As long as you know this going into investing in JEPI, then the ever-changing dividend will not come as a surprise!
How is JEPI Taxed? For Canadian Investors
Since Americans can hold JEPI in tax-friendly accounts it is easy to collect dividends without having to worry about taxes.
In Canada, JEPI certainly isn’t as tax-friendly for investors. Not only do you have to pay foreign exchange in US dollars when you buy JEPI, but the dividends will be taxed no matter where you hold them. If you hold JEPI in a non-registered account, will be taxed as foreign investment income.
If you want to invest in JEPI in a registered account like your TFSA, you will still have to pay a 15% withholding tax for any US dividends.
As a Canadian investor, you will be taxed quite a bit when it comes to holding JEPI and collecting its dividends.
JEPI Covered Calls: A Unique Approach to Options Premiums
JEPI is not a standard covered call ETF. In fact, JEPI utilizes something called Equity-Linked Notes rather than writing traditional covered call contracts. What is an Equity-Linked Note or ELN? It is described as a fixed-income asset with additional returns which are linked to the price performance of the underlying equity.
The fund managers for JEPI write these ELNs at out-of-the-money strike prices. What does this mean? When it comes to writing covered calls, most ETFs write them at or in the money. This provides a higher premium but also provides less upside when it comes to capital appreciation.
But when you write out-of-the-money options, you can collect premiums while also allowing for capital appreciation from the underlying stocks.
About 20% of JEPI’s portfolio is allocated to the ELNs while the rest of the fund is held in stocks. This provides a relatively safe floor for JEPI’s price, while the ELNs provide all of the income distributions to shareholders.
JEPI vs JEPQ
What is JEPQ ETF? JEPQ is the JP Morgan NASDAQ Equity Premium Income ETF. As you might imagine, JEPQ holds 87 NASDAQ stocks including the largest tech companies in the world like Apple, Microsoft, Amazon, Alphabet, NVIDIA, Tesla, and Meta Platforms.
It has the same structure as JEPI with a little more price volatility due to being heavily invested in tech and growth stocks.
JEPQ yields a monthly dividend to shareholders with a current 30-Day SEC Yield of a whopping 11.76%.
The fees are the same as JEPQ also has a matching MER of 0.35%. JEPQ has not had the same investment volume as JEPI as it only has about $6.5 billion in assets under management.
If you are looking for the potential for more capital appreciation, JEPQ is a great way to own the best tech stocks and earn a high dividend yield.
So far in 2023, JEPI has gained 2.88% while JEPQ has returned 22.78% in its price to shareholders.
JEPI vs TSLY
What is TSLY ETF? TSLY is the very new YieldMax TSLA Option Strategy Income ETF. This fund focuses solely on writing and selling options against Tesla’s stock to earn income to distribute to shareholders.
As most options traders know, Tesla is one of the most volatile stocks on the market. This also means it pays some of the best premiums on options.
TSLY has a staggering current distribution rate of 57.07% but investors should not expect this to last forever. The 30-day SEC yield is a bit more realistic at 6.03%.
In exchange for the high dividend yield, shareholders will pay an MER of 0.99%. This means for every $100.00 you have invested in TSLY, you will be paying $0.99 in fees.
This ETF was introduced in November 2022 and only has $747 million in assets under management. As that number grows, we can expect the high yield to come down as dividends are distributed to more shareholders.
JEPI vs SCHD
What is SCHD ETF? It is the ultra-popular Schwab US Dividend Equity ETF. While this is not an apples-to-apples comparison, it is comparing two of the most popular dividend funds in America.
SCHD is a dividend equity ETF that holds 104 different high-growth dividend stocks. The top five holdings in SCHD are Amgen, Verizon, AbbVie, Merck, and Coca-Cola.
What is so appealing about SCHD? It provides steady capital and dividend growth. Currently, SCHD pays out a 3.87% dividend yield that is paid out every quarter.
Another attractive thing about SCHD is that its MER Is a very low 0.06%.
Over the past five years of trading, SCHD has provided a return of 35.75% without even including dividend reinvestments.
Read Our Full SCHD Review Here:
The Bottom Line: is JEPI a Good Investment?
Here’s where your own personal investment strategy comes into play. Is JEPI a good investment? For some people, yes. JEPI serves a purpose in any portfolio, regardless of what your strategy is. It provides instant income on a monthly basis as well as some built-in downside security.
But is JEPI a good investment for everyone? Absolutely not. Canadian investors will have a hard time justifying JEPI with the taxes on foreign dividends in any account. Younger, growth-oriented investors will balk at the lack of capital appreciation.
One strategy is to take JEPI’s monthly dividends and reallocate them to other holdings. In a volatile market like we are currently in, it might be safer to put some funds into JEPI to collect your dividends. But in a bull market, you are better off investing in a fund that provides capital appreciation as well. That might be a good time to switch over to JEPQ or invest in SCHD.
As always, make sure to do your own due diligence to see if investing in JEPI makes sense for you. This article is not meant to be financial advice, but rather an introduction to what investing in JEPI can mean for you.