Recently, it came to my attention that the JPMorgan (NYSE:JPM) Equity Premium Income ETF (JPMorgan Equity Premium Income ETF (NYSE:JEPI)) had grown over the years to become the most popular actively managed ETF in the U.S. market. As of June 22nd, 2023, JEPI has swelled to over $26 billion in AUM, making it the largest, according to the ETF Central Screener.
What gives? In a time of increasing ETF competition thanks to white-label firms and ETF entrepreneurs along with established firms like iShares and Invesco steadily expanding their lineup, I thought it would be good to understand the perspectives of the end customer: the ETF investor.
Where better to do this than Reddit? This forum houses a variety of popular investing-related communities, also known as Subreddits. Sure, everyone knows r/wallstreetbets, but there are also less crazy ones like r/dividends and r/investing that discuss more sustainable strategies.
Here's a look at some of the key reasons why retail investors like JEPI so much. Keep in mind that this is a quick qualitative study using anecdotal evidence and small sample size, and not a rigorous quantitative survey. I wouldn't use the results for ETF product marketing, but it could lead to some new insights.
For readers unfamiliar with JEPI and how it works, I wrote a deep dive analysis of this derivative income ETF back in March, which you can read here.
JEPI historically outperformed
Retail investors are great at "buying high, selling low." When a fund is outperforming, they clamor to pile into it. When it starts faltering, they flee for the exit. This dynamic can be seen in play with JEPI, which only fell by -3.54% in 2022 thanks to its covered call overlay and defensive holdings. Naturally, investors seeking refuge from the bear market flocked to it.
However, it is important to note that JEPI is not a safe ETF by any means. A covered call strategy can buffer against losses, but only to the amount of premium received. It is not a true hedge, and still exposes investors to more or less the same downside risk. JEPI's portfolio of equities may appear defensive, but will likely drop during a bad crash like everything else.
u/Cosmo_Shaman: "Same here. JEPI and JEPQ are performing better than almost everything, including SCHD and my utilities. AVGO and NVDA are my exceptions."
u/BBQShoe: "I'm younger and a huge JEPI fan because I'm not convinced that we'll see the same amount of growth in the next 30 years that we have in the previous 30. In a sideways market I'm still going to do well."
JEPI produces high income
Most retail investors also have a problem with yield-chasing. Instead of focusing on total returns (which are capped with a covered call strategy), they love looking at high distribution yields. Bonus if the distribution is paid on a monthly basis. The psychological "kick" from seeing a big dividend payment hit an account can be exhilarating.
This appeal becomes more alluring for those investing in a tax-deferred or exempt account like a Roth IRA, or for those looking for steady monthly income to fund withdrawals. With a current 30-day SEC yield of 8.48%, there are few equity ETFs on the market that can rival this, short of some of the covered call ETFs from competitor Global X.
u/Imaginary_Belt4976: "I'm closing in on 1k shares and the payments are getting so nice. It currently represents about 25% of the max permitted annual contributions to that registered account. All tax deferred. (Canadian) I honestly think another 5 years or so of directing my retirement savings to JEPI might be large enough to live off of without even factoring in any other investments or government pension. I am envisioning a "semi retirement" of sorts where I work through my own business only. This way, I can pay myself entirely in dividends and perhaps take advantage of the elusive 0 income/50k dividends/0 tax thing for as many years as possible."
u/hendronator: "Every investment has its day in the sun and shines beautifully above the rest. Will that continue for JEPI and JEPQ…tbd? One thing is sure….it will probably perform close to the market over time. It is designed to be less volatile and generate more income. If the market goes sideways, they are going to be superior. If the market skyrockets higher, they will underperform their underlying indexes. I have 10% of my portfolio in JEPI. My hypothesis is that it is foundational to my investment portfolio as I approach retirement to provide income if needed. And I have other growth investments to increase total return."
JEPI charges reasonable fees
One of the main drawbacks of actively managed ETFs is the prospect of underperforming an index benchmark, especially after the effects of higher fees compounding over the long-term. JEPI largely avoids this by charging a 0.35% expense ratio. For reference, a popular competitor, the Global X Nasdaq 100 Covered Call ETF (QYLD) charges 0.60%.
0.35% is a lot compared to passively managed index ETFs with low single-digit expense ratios, but in the case of JEPI it pays for active security selection and a covered call writing strategy (using exchange-linked notes). For most investors, picking a portfolio of stocks and writing call options on them individually, while managing the options overlay is likely too time consuming.
u/Chungus_The_Rabbit: "For an actively managed instrument .35 doesn’t seem unreasonable. Especially, for a trading powerhouse like $JPM."
u/JustSomeAdvice2: "It's possibly one of the lowest fees out there for an income fund. SCHD is a passive dividend fund, which is also competitively priced."
This content was originally published by our partners at ETF Central.