Rising interest rates are opening up opportunities to seek income through active and innovative exchange-traded funds (ETFs)1. In the second of a two-part series, we share insights on a unique options strategy1 we employ in equity premium income ETF investing.
A multi-pronged approach to total returns
The JPMorgan Equity Premium Income ETF (JEPI)2, one of the world’s largest and fastest-growing actively managed equity ETFs with over A$24 billion3 assets under management as of 31 December 2022, seeks to deliver monthly distributable income and a significant portion of the returns associated with the S&P 500 Index, but with less volatility.
The strategy combines a defensive equity portfolio which employs a time-tested, bottom-up fundamental research process, with a disciplined options overlay consisting in writing out-of-the-money S&P 500 Index call options to generate distributable monthly income.
Options premium generated can vary depending upon market volatility – as volatility increases, the potential for incremental income and upside also rises. Read more >
Annualised total return illustrations in a historically normalised environment
4. Provided for information only, to illustrate underlying portfolio and asset class characteristics. Indicative ranges provided are for information only. Returns or distributions are not guaranteed.
How our options strategy is unique
Our JEPI strategy5 seeks to generate income by selling options and investing in US large cap stocks, seeking to deliver a monthly income stream from associated option premiums and dividends.
Here’s how our unique options strategy works:
- We start out with an underlying equity portfolio that is more conservative in nature, with less market beta and volatility. More defensive equities can be better positioned when markets go down, a high-quality, low-volatility equity portfolio is positioned to fare better. Read more >
- We sell one-month, out-of-the-money S&P 500 Index call options while rolling a portion every week to adapt to changing market conditions. This is overlaid on top of a defensive equity portfolio. With other covered call strategies that sell single security options, investors often see stock winners taken away and then they’re stuck with the stock losers. We want to keep our equities, so we sell options on the index.
- When volatility spikes, JEPI seeks to provide higher income when investors most need the buffer against fluctuating prices. When investors sell out-of-the-money call options, they may give up some of the market upward potential6 but may maintain consistent long-term performance.
- Another differentiator is converting the options premium into coupon. Many covered call strategies treat their options income as capital gains, which leaves the potential for return of capital. At the end of the year, investors then need to go back and recalculate the cost basis of their holdings, which can be a burdensome process. We believe treating the options income as coupon helps set up the potential for monthly distributable income.
- We follow a consistent approach without trying to time the market. Selling one-month call options, and laddering the options each week allows us to adjust how much of the market’s advantages and income we can receive in differing volatility environments. When volatility goes up, options tend to get more expensive. Because we are selling options, they are more attractively valued. In other words, we have the potential to optimise the market’s upward advantages and more income. Especially in the current investment environment, that is a relatively attractive combination.
Conclusion
J.P. Morgan Asset Management’s actively managed ETFs tap into the full resources of our global research network, allowing investors to access outcome-oriented solutions through a range of long-established investment strategies. Our global ETF business has over US$75 billion of assets under management7. Read more >
Provided for information only based on market conditions as of date of publication to illustrate general investment process, not to be construed as offer, research or investment 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. Risk management does not imply elimination of risks.
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, and are not to be construed as offer, research or investment advice. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2. JPMorgan Equity Premium Income ETF (JEPI) is the marketing name of the JPMorgan Equity Premium Income Active ETF (Managed Fund).
3. Source: Morningstar, 31.12.2022, US dollar/Australian dollar spot rate 1.4695.
5. Source: “PM Corner: In conversation with Hamilton Reiner”, J.P. Morgan Asset Management, data as of 22.04.2022.
6. There is a potential to forego some capital appreciation as a result of writing out-of-the money S&P 500 Index call options. The Investment Manager (Portfolio Manager) seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met.
7. Source: J.P. Morgan Asset Management, data as of 31.12.2022.
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