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Source: J.P. Morgan Asset Management, as of 28.02.2023. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such professional's future performance or success.

Recent banking sector stress in the US and Europe, persistent inflation and the actions of some major central banks have left markets in turmoil and investors uncertain about the future. Some investors are rethinking their approach to generating income - continue to hold cash and core bonds or extend into higher-yielding markets such as equities but stomach the risk and volatility?

This Q&A highlights the search for income through an alternative equity strategy.

Q1: How are investors evaluating income from Equities?

A: An uncertain market outlook is prompting some investors to be creative and to be outcome-oriented¹, employing strategies that allow them to stay invested through various market conditions while hedging against down-market volatility. Some of these strategies aim to generate income through equity options-based solutions.

The income-seeking approach of JEPI comprises two building blocks - investing in an actively managed portfolio of defensive US large cap stocks and selling S&P 500 Index⁴ call options - as the investment managers seek to deliver a consistent income stream from associated option premiums and stock dividends². This unique strategy seeks to generate consistent annualised income⁵, distributed monthly, with two-thirds of the volatility and beta of the S&P 500⁴.

6. Source: J.P. Morgan Asset Management. Provided for information only, to illustrate underlying portfolio and asset class characteristics.

• For income-oriented or total-return investors, JEPI can present relatively attractive opportunities for income⁷ in an overall portfolio. It can also act as an equity alternative where investors can seek to boost income with lower volatility, while forgoing a portion of the market’s upside.

Q2: What risk can option-writing strategies present?

A: Not all option-writing strategies⁷ are created equal.

JEPI doesn’t look to time the market and the investment managers have deep expertise in implementing the options process. In JEPI’s approach, the options overlay consists of selling S&P 500 Index options that are one-month, out-of-the-money call options. At the same time, in order to dynamically adjust the upside and income to the volatility landscape, the options reset a portion of the options on a rolling weekly basis. This approach allows the investment managers to better balance income with total return.

When volatility goes up, options tend to get more expensive. Because the strategy is selling options, they tend to be relatively attractively valued. In other words, it seeks to optimise the market’s upward advantages and more income.

Q3: What are the key considerations⁷?

A: First, JEPI may not capture all of the market’s upside. The strategy is designed to enhance distributable income comprising dividends and options premium. In return for the option premium, an investor may forgo a portion of the market’s upside. One building block of the strategy is an underlying equity portfolio that is more conservative in nature, with less market beta and volatility. More defensive equities can help because when markets fall, a high-quality, low-volatility equity portfolio is better positioned to withstand such volatility.

Second, there are positionings for different market environments. For example:

• Falling markets - such a conservative equity portfolio seeks income to buffer possible downside
• Sideways or gently rising markets - seeks capital appreciation and income
• Rising markets - can potentially forgo some upside for income

Third, there are varying distributable income. The options premium generated can vary, depending on prevailing volatility - when volatility increases, both income opportunities and the potential for capital appreciation also increase and vice versa. 

JPMorgan Equity Premium Income ETF (JEPI) is the marketing name of the JPMorgan Equity Premium Income Active ETF (Managed Fund).
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.
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. The Investment Manager (Portfolio Manager) seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met. 
3. 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.
4. The S&P 500 Index is an unmanaged index generally representative of the performance of large companies in the US stock market.
5. 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.
7. Source: “PM Corner: In conversation with Hamilton Reiner”, J.P. Morgan Asset Management, 22.04.2022. 
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