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Investors, depending on their investment objectives and risk appetite, are veering more towards alternative income strategies as real yields in fixed income remain low and volatility persists in equities. This Q&A with Hamilton Reiner, Portfolio Manager, highlights the search for income through an equity premium income strategy¹ in an income-hungry world.

Q1: How are investors tackling low real yields and persistent market volatility?

After a year with no shortage of volatility, some investors have flocked to the safety of cash². As a result, some investors today are underinvested in equities as well as searching for consistent income.

While the unprecedented pace of interest rate hikes has brought some income opportunities back to fixed income, it is important to remember that inflation has also been high. As real yields in fixed income remain low, and volatility in equity markets may persist in 2023, investors are considering other asset classes.

Investors are employing innovative strategies in their search for total returns³ - the decision doesn’t have to be limited at between providing income and capital appreciation^1,4. Though equity markets have rallied relatively quickly to start the year, investors are likely to face more muted returns with higher volatility as compared to the last few years.

One of the ways the strategy garners this balance is by employing equity options , comprising a high-quality equity portfolio and selling S&P 500⁵ Index call options. The equity premium income strategy seeks to generate income by selling options and investing in a portfolio of more defensive, higher quality US large cap stocks. Read more >

The strategy seeks to deliver a monthly income stream from associated options premium and stock dividends, with reduced volatility versus the S&P 500, using no leverage and with daily liquidity. In this strategy, investors would forgo some upside when the stock market rises for a consistent income stream⁴. Read more >

A similar strategy is being managed with an underlying equity portfolio benchmarked to the more technology-focused Nasdaq-100 that seeks income as well as growth exposure.

Q2. How are such strategies positioned during downside scenarios?

The goal in constructing the underlying equity portfolio is to provide exposure that is more conservative in nature, with less market beta and volatility. More defensive equities can be better placed in volatile markets, providing a high-quality, low-volatility equity portfolio.

Such strategies strive for a diversified portfolio, so there is no one stock or sector that will drive an outsized portion of the returns or volatility of the strategies⁴. This results in structural underweights to some of the larger and more volatile names and sectors in the market, such as information technology. In a year like 2022, this combination of higher-quality, lower-volatility exposure and diversification helped the strategies manage downside better⁴.

Q3. What roles can such strategies play in an overall portfolio^1,3?

Such strategies can play different roles, such as:

1. Within have an income model, a modest allocation to an equity premium income-type product can help seek opportunities for a higher and more diversified income source.
2. These strategies can also supplement equity exposure as they have reduced equity beta versus the equity market. Total returns can be received as they seek dividends, options premium and some of the market’s upside over time. However, this could lead to forgoing some of the upside. Such strategies can present opportunities for consistent income with reduced volatility.
3. As people remain less enamoured by low real yield levels and credit default risk in bonds, equity options-based strategies can replace or compliment exposure to high yield, emerging market debt, or US preferred, providing opportunities to seek income with similar levels of beta.

JPMorgan Equity Premium Income ETF (JEPI) is the marketing name of the JPMorgan Equity Premium Income Active ETF (Managed Fund). JPMorgan Equity Premium Income Hedged (JHPI) is the marketing name for JPMorgan Equity Premium Income Active ETF (Managed Fund) (Hedged). JPMorgan US100 Equity Premium Income (JPEQ) is the marketing name of the JPMorgan US 100Q Equity Premium Income Active ETF (Managed Fund). JPMorgan US100 Equity Premium Income Hedged (JPHQ) is the marketing name of the JPMorgan US 100Q Equity Premium Income Active ETF (Managed Fund) (Hedged).
Provided for information only based on market conditions as of date of publication, not to be construed as offer, research, investment recommendation or advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations, may or may not come to pass. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Provided to illustrate underlying portfolio characteristics only. Not to be construed as offer, research or investment advice. Past Performance is not indicative of current or future results.Diversification does not guarantee investment return and does not eliminate the risk of loss.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2. Source: “PM Corner: The power of alternative income strategies”, J.P. Morgan Asset Management, 31.03.2023.
3. Returns or distributions are not guaranteed. Distribution may be paid out of capital or income or both. The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. Based on historical observations.
4. The Investment Manager (Portfolio Manager) seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met.
5. The S&P 500 Index is an unmanaged index generally representative of the performance of large companies in the US stock market.
6. Risk management does not imply elimination of risks. Provided to illustrate the investment process. Dividend or returns are not guaranteed. Please refer to offering documents for details on distribution policy.
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