A Closer Look at JPMorgan Equity Premium Income ETF

Key Morningstar Metrics for JPMorgan Equity Premium Income ETF

• Morningstar Medalist Rating: Bronze
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: Above Average

JPMorgan Equity Premium Income ETF JEPI 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 portfolio that targets stocks from the S&P 500 while systematically selling one-month call options on the index. The fund uses slightly out-of-the-money calls, leaving modest room to capture the index’s upside. Manager Hamilton Reiner staggers the one-month calls into multiple weekly buckets to diversify the expiration date and strike prices. However, he doesn’t directly write these calls for the fund. Instead, he purchases equity-linked notes that provide exposure to the profits on those call options. This simplifies the fund’s tax treatment but precludes it from taking advantage of lower long-term capital gains rates.

Reiner’s team alleviates counterparty risks on the equity-linked notes by spreading trades across multiple issuers and limiting transactions to global financial institutions that pass regular risk monitoring. Reiner and his team regularly test pricing and liquidity on the equity-linked notes to ensure they’re getting the best deal.

In general, covered-call funds have not been the best buy-and-hold investments for investors with a longer time horizon. The stock 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, such as selling investments with long-term capital gains. However, covered-call funds provide a simpler way to outsource this task and can alleviate problems that come with self-implementation.

This strategy’s options income offsets some losses incurred during drawdowns, and higher implied volatility during these periods often translates to higher call premiums and higher income. The stock portfolio is less sensitive to the market’s movements, which lessens the sting. It beat the index significantly during the late-2018 selloff and the 2022 market meltdown. Shorting call options caps the fund’s upside relative to the S&P 500, though the fund has still outperformed both the category index and category average since its inception.

JPMorgan Equity Premium Income ETF: Performance Highlights

Performance has been in line with expectations. The fund’s capped upside and defensive stock sleeve left it trailing the S&P 500 during market rallies. The I share class on the US fund lagged the index by over 12 percentage points between November 2023 and March 2024.

Nonetheless, it has outperformed the index during major downturns. The fund beat the S&P 500 by 5.49 and 14.23 percentage points during 2018’s fourth-quarter selloff and the 2022 market meltdown, respectively. On top of the buffer provided by its call premiums, the fund’s defensive stock portfolio also cushioned large drops. For instance, the stock sleeve outpaced the index by 10.88 percentage points in 2022, an impressive feat even after accounting for its lower exposure to the market’s risk.

The fund also provided better downside protection than its average category peer and the CBOE S&P 500 BuyWrite Index category benchmark. The I share class outpaced the category average and index by 3.4 and 4.6 percentage points, respectively, during 2022’s market meltdown. While the recent market rally has shaved off some of its outperformance, its since-inception returns are still solid. The I share class outpaced the category average and index by over 2.0 and 4.0 percentage points annualized, respectively, from its September 2018 inception through August 2024.