What are some of the challenges facing investors today?

Equity markets have been resilient in 2023, but the rally has left investors feeling uneasy. Many are wondering if they’ve “missed it” and, as such, are still sitting in cash¹ trying to figure out when to enter the market. It was also a historically narrow rally in scope, with the vast majority of returns driven by seven stocks². At this point, investors may be looking for opportunities in equities beyond just the market leaders of this year, especially given many other areas of the market still look attractive from a valuation perspective.

Our team runs a variety of portfolios that can help investors maintain their strategic asset allocation by tapping into equities with a lower beta approach. Our equity premium income strategies, for example, seek high and consistent levels of income and appreciation potential, with lower volatility than the equity market.

As part of the equity premium income platform, you also run the largest active ETF in the world³. Why do you think the market has adopted these strategies so quickly⁴?

Investors are looking for a differentiated way to generate total return in equities. Within the equity premium income strategies, the primary outcome is income, which is balanced with the potential for capital appreciation.

We manage two different equity premium income strategies with distinct underlying equity portfolios:

• Equity Premium Income (JEPI): a higher quality, defensive underlying active equity portfolio benchmarked to the S&P 500
• US 100Q Equity Premium Income (JPEQ): a lower tracking error Nasdaq 100 benchmarked portfolio  

We then seek to generate income in these strategies through an options overlay that consists of selling out-of-the-money index-level calls every week to adapt to changing market conditions. When volatility spikes and interest rates rise, our strategies have the potential to provide higher income that can help cushion against fluctuating prices.

With both the Equity Premium Income (JEPI) and US 100Q Equity Premium Income (JPEQ) strategies, we are willing to forego some upside in exchange for monthly income, without using leverage and without taking on interest rate or duration⁵ risk.

With the backdrop of an uncertain market, what are the opportunities for using the equity premium income strategy⁶?

We have observed four common use cases for the equity premium income strategy:

1. Add to income portfolios to pursue consistent, attractive yields without impacting much by changes in interest rates or equity dividends.
   
2. Replace or complement higher-yielding bonds with a strategy presenting no duration⁵ or credit risk,  and comparable, if not higher, income potential in exchange for more beta.
3. Deploy excess cash¹ for investors looking to ease back into stocks with about one-third less volatility.
   
4. De-risk equity portfolios by locking in gains from other equity strategies and reinvesting the proceeds in a more conservative alternative⁴.

Looking ahead, while the direction of equity markets is unclear, there lies opportunities for the equity premium income strategy.

• If the 2023 market rally continues and expands outside of the few mega-cap stocks (the “magnificent 7”)², this strategy seeks to capture a greater portion of market upside given its more diversified and higher quality nature.
• On the other hand, should we see a market selloff, higher volatility may provide higher levels of income though the option overlay. In addition, the higher quality nature of the underlying portfolio also helps navigate market volatility.
• Finally, should we see a market that remains more rangebound, equity premium income strategies may still provide a healthy total return through income generated by the options.

Given the highly concentrated market leadership this year, how are investors utilising the US 100Q Equity Premium Income Strategy⁶?

Like its S&P 500 benchmarked predecessor, the US 100Q Equity Premium Income Strategy seeks less volatility and beta than the index while providing a balance between income and total return⁴. For investors who like growth, more tech-focused names, this strategy can provide that exposure with a more conservative approach and a stream of monthly income.

Given that the Nasdaq 100 is a more volatile index than the S&P 500, the income payout on the Nasdaq strategy tends to be slightly higher on average. We see investors choose between the two strategies based on what kind of equity exposure they seek. With the different and complementary nature of their underlying exposures, we also see investors combining the two strategies in their portfolios. This combination can help investors align sector exposure with that of the S&P 500 while pursuing a lower beta and volatility profile with consistent monthly income. Click here to read more about how the two strategies can complement each other¹.  

Provided for information only based on market conditions as of date of publication, not to be construed as offer, 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 strategy 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. Yield is not guaranteed. Positive yield does not imply positive return.

1. Investments involve risks and are not similar or comparable to deposits. Not all investments, strategies or ideas referenced are suitable for all investors. Provided for information only, not to be construed as investment advice.
2. Refers to Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Tesla Inc. and Nvidia Corp.
3. Source: Morningstar. JEPI Based on 2023 Global Actively Managed ETF AUM as of 30.09.2023.
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. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
6. 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.