[ad_1]
Investors bet big on the JPMorgan Equity Premium Income ETF (JEPI) earlier this year, even as excitement around artificial intelligence fueled a growth stock rally and left the fund lagging the broader market. But as the stock market rally has sputtered, the $29 billion fund is showing promise once again. As of Monday morning, the JPMorgan fund was down 1.4% on a total return basis over the past three months, according to FactSet. That is notably better than the 3.7% decline suffered by the SPDR S & P 500 Trust (SPY) . JEPI YTD mountain JEPI has underperformed the broader market this year but has proved stable in the recent market dip. That has helped narrow the performance gap for the year, though it is still large. JEPI is now up about 4.5% for the year on a total return basis, including reinvested dividends, versus 14.1% for SPY. Still, the fund has brought in $13 billion of inflows this year, according to FactSet, including more than $800 million over the past month. How it works The fund, which combines an actively managed equity portfolio focused on quality stocks alongside income generated from selling call options, is positioned to perform well in sideways or declining market environments because the income component helps smooth out the fund’s returns. JEPI dramatically outperformed the S & P 500 in 2022 when stocks fell into a bear market, even when accounting for its 0.35% management fee. The downside to the options strategy is that those trades, made through equity-linked notes, can be losers when markets rise. But the fund might still perform well in certain types of rallies. Hamilton Reiner, the portfolio manager for JEPI, told CNBC that the fund’s equity portfolio performs better when there is a broad market rally, as opposed to the narrow rally this year that’s been led by the so-called Magnificent 7 . “For the other 493 names that have really not participated as much this year, they get cheaper by the day as you start looking at next 12-month numbers. I think there’s a chance, and a decent chance, that we do get a Santa Clause rally. And if that Santa Clause rally happens, it probably gets expanded outside those seven names,” Reiner said. “And as our strategy actually is much more of a balanced portfolio where we [tend to] cap every name at 2%, we cap every sector at 17.5%, so it’s a more diverse portfolio, it should do pretty well if and as the rally expands out,” he added. The fund has changed its equity holdings throughout the year. Reiner said that the JEPI team, for example, has added to its position in Adobe , which is now the third-biggest holding in the fund. Reiner said that the fund has also trimmed its exposure to utilities and looked to add industrial stocks “where you have a good visibility out one, three and five years about how much money they are going to make.” Trane Technologies and Honeywell are two of the largest industrial positions in the portfolio. Options generate yield JEPI’s massive rise in popularity was helped by an eye-popping yield, which topped 10% for much of last year. The fund’s current 30-day SEC yield is 7.9%. Reiner said that the fund’s options income strategy involves selling call options, through equity-linked notes, that have a 30% chance of finishing in the money. That means that when implied market volatility is average or below average, as it has been for much of this year, JEPI’s yield will likely fall below 10%. Importantly, the fund sells options on the S & P 500 as a whole, not on its individual holdings as is common in a traditional covered call strategy. That does add some stock picking risk into the portfolio, but it allows the fund to benefit when an individual holding sees a strong rally. “When you have a portfolio of names, if you sell options on all of those names, you end up having your winners taken away from you and you’re left with your losers. By doing options at the index level, we generate income by removing beta but never having our stocks taken away from us,” Reiner said. JEPI is not the only active income strategy in the JPMorgan ETF lineup. The firm recently launched a Hedged Equity Laddered Overlay ETF (HELO) , which employs a multi-pronged options approach. It also runs Nasdaq Equity Premium Income ETF (JEPQ) , which has more exposure to technology stocks and has a total return of more than 25% this year. “To give people the ability to own growthier, tech-ier names and still get the ability to get some income has found a real nice sweet spot for investors,” Reiner said.
[ad_2]
Source link