JEPI Continues To Work For IRAs In 2022 (NYSEARCA:JEPI)

JPMorgan’s Equity Premium Income ETF (NYSEARCA:JEPI) continues to be a reasonable supplement and/or alternative to a core or total market equity allocation within a tax advantaged retirement account. This is an update of JEPI’s performance so far in 2022, where I proposed it at the start of the year as an IRA strategy for this year due to the likelihood of increased volatility.

Once again, I believe this ETF is suited for an IRA, and not a traditional brokerage account, though it may work well in a variety of alternative strategies. Investors should note that this ETF’s distributions are taxed as ordinary income, which means they should not qualify for the lower qualified dividend rate. That is the main reason why I primarily suggest that allocations into JEPI be housed within IRAs and similar tax advantaged accounts, such as HSAs, SEPs, and related retirement accounts.

JEPI maintains a diversified portfolio of U.S. large cap stocks, and seeks to generate monthly income through dividends and the selling of covered calls. The ETF has a total cost of 0.35 percent, which is high for a passive index fund, but JEPI is not at all passive. JEPI has an active covered call strategy, and the fee is competitive for such an ETF.

Recent Dividends

JEPI’s monthly payout will vary depending upon how well the call writing strategy worked that month. That performance depends upon multiple factors, including if any dividend payments were received, but it is primarily driven by whether the written calls got called, or expired worthless. Therefore, JEPI’s call writing strategy performance may affect the distribution, the composition, and the ETF’s net asset value.

Below are the dividends paid so far in 2022:

As the above chart shows, JEPI pays a dividend early each month for the prior month. JEPI actually paid the December dividend in early January, which would add $0.4586 on January 4, but it went ex-dividend on December 30. Of those recent dividends, one can see there is variation from month to month, with February and March differing by just over 20 cents. Another way of looking at it is that the average recent month seems to produce a dividend of about $0.46, plus or minus up to 25 percent.

A meaningful factor is the question of market volatility. Payouts should be higher when volatility increases, because implied volatility is a factor in options pricing. Since increased volatility generally means increased options pricing, and 2022 has remained fairly volatile, it should be a good year to sell covered options.

Lower Beta, Yet Outperforming

JEPI’s holdings are not market weighted, but closer to equal weighted. No single publicly traded company makes up more than two percent of the total holdings. JEPI frequently holds multiple positions in S&P 500 index futures that could combine to equal a more significant part of the portfolio, but such use of futures appears reasonable given that the fund “Seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income.”

Since JEPI holds a portfolio of equities, it carries market risk. This means JEPI is likely to fall when the market declines, though it should generally act in a low beta manner. JEPI is an actively managed fund that makes decisions based upon perceived value, and this may differ from reality. Despite attempting to be a low volatility fund, active management always adds a potential element of risk in the form of human error.

So far in 2022, JEPI is actually outperforming the S&P 500 by a substantial margin. In fact, JEPI is outperforming the S&P 500 even before factoring JEPI’s distributions. The difference is visible on the comparison chart:

Even though both JEPI and the S&P 500 are both down year to date, JEPI is down less. Also, it has already distributed in dividends about as much as the S&P 500 will this year. Both are down, but JEPI is down less because it has a more conservative portfolio, and a lower beta. Also, the dividends are larger than they were in early 2021, because of the increased volatility in the market now.

JEPI is likely to be a reasonable supplement to a core equity portfolio that is transitioning into income production, which is often the case for retirees. It is also not entirely clear that traditional income producing assets offer greater safety. Interest rate and duration risk profiles are likely to be comparable to worse for junk bonds. Given current interest rate volatility, even mid-dated Treasury notes appear to have duration risk that is comparable to a conservative equity portfolio’s risk profile.

Conclusion

JEPI’s attempt to provide monthly income through a portfolio of low volatility equities appears to be a reasonable alternative to junk bonds, and possibly a measure towards avoiding corporate bonds and/or sovereign debt. It is also a sensible supplement to a core equity portfolio that requires increased income production while maintaining equity exposure.

2022 continues to be a volatile year, which means options are likely to be expensive, and market returns will be capricious. JEPI provides monthly income based upon selling such options, which has been a successful strategy this year. I believe that strategy should continue to work throughout 2022, and potentially continue to outperform the market.