Popular boomer candy ETFs like the JPMorgan Equity Premium Income ETF (JEPI) are in the spotlight this year as the stock market goes through turmoil. Most stocks have crashed, with the S&P 500 index nearing a bear market, where an asset tumbles by 20% from a local top. This article explores why the JEP ETF is beating popular S&P 500 funds like SPY and VOO.
What is the JEP ETF?
JEPI is a popular exchange-traded fund that aims to provide regular dividend payouts to investors and expose them to quality blue-chip companies.
It uses a relatively simple approach that other covered call ETFs like JEPQ and SPYI have now emulated.
The fund invests in a group of quality blue-chip companies like Apple, Microsoft, NVDIA, and JPMorgan.
It then uses a portion of its assets to sell call options on the S&P 500 index. A call option is a trade that gives an investor a right, but not the obligation, to buy an asset at a certain time, popularly known as the expiry period.
The expiry period is the period when an option ends, and the trade becomes worthless if not executed. When it does this, the fund receives a premium, which is the price that the buyer pays to the seller of the call option to acquire he contract. This premium is usually quoted per share.
The JEPI ETF makes money in three main ways. First, it benefits when the underlying stocks rise. Second, it receives the premium payment, which it then distributes to its investors through a monthly dividend. Third, it receives the dividend payouts from the underlying companies.
JEPI’s structure means that it always pays a higher dividend than the S&P 500 index. With the stock now sharply lower, its dividend yield has jumped to 8.34%, which is a good number. This means its investors receive monthly payments to offset the ETF’s crash.
Is JEPI ETF beating the VOO and SPY ETFs this year?
Covered call ETFs have attracted scrutiny in Wall Street over the years. One argument is that they constantly underperform the benchmark indices like the S&P 500 and Nasdaq 100 indices over time.
Historically, JEPI has always underperformed the S&P 500 index regarding its price return. It has crashed by over 17% in the last three years, while the VOO ETF has jumped by almost 11% in the same period.
However, the spread narrows a bit when you look at the total return, including the monthly dividend checks. In this case, the S&P 500 index has risen by 11%, while the JEPI fund has jumped by 7.8%. This performance is likely because the index was in a strong uptrend after the pandemic.
JEPI and VOO ETFs have plunged this year because of Donald Trump’s trade war. It has dropped by 11.1%, while the VOO fund has dropped by 15%.
Therefore, this performance means that it makes sense for S&P 500 ETF investors also to allocate some cash to JEPI for its regular dividends.
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