2023 was a year that caught many investors off guard. Equity markets were driven by the exceptional performance of a handful of tech winners and delivered strong returns, particularly in the US. This strength has continued so far in 2024, but the rally has left investors feeling uneasy about what to do next. Many are wondering if they’ve missed the boat and are still sitting in cash trying to figure out when to enter the equity market.

However, it’s important to remember that time in the market is far more important to the average investors achievable long-term returns than timing the market, which is notoriously difficult. For investors looking to maintain their strategic asset allocation and get money off the side-lines and into equities, the JPM Global Equity Premium Income Active UCITS ETF (JEPG*) targets to achieve low beta equity exposure with high and consistent levels of income.

Achieving a total return in equities

We are so excited to bring our equity premium strategy to the UCITS space through JEPG*. The primary investment philosophy of the strategy is generating income but it seeks to deliver total return in three different ways:

• Dividends from the underlying equity portfolio
• Option premiums from selling out-of-the-money calls
• The potential for some capital appreciation

The portfolio starts with a research enhanced, high quality, defensive underlying equity portfolio. We then generate income through an options overlay that consists of selling out-of-the-money index-level calls and paying the premiums to investors as income. We are willing to forego some market upside in exchange for steady monthly income, without using leverage and without taking on interest rate or duration risk.

Many use cases for an equity premium income strategy

Let’s be honest, income is something that never goes out of style. Investors need or want income either to be paid out or to compound over time. Outcome oriented investing can always benefit portfolios. However, we have observed three common use cases for the equity premium income strategy:

• Within an income model, a modest allocation can act as a booster shot to income and complement traditional income and dividend strategies.
• The strategy can be used as a diversified and lower beta equity alternative. Since a large portion of the total returns will be generated through option premiums and the underlying equity portfolio looks different to the MSCI World Index, we have seen many investors use this strategy to complement traditional equities.
• Equity options-based strategies can replace or complement higher yielding fixed income strategies without adding duration or credit risk and offering comparable — if not higher — income potential in exchange for equity beta.

Defining our outcomes

There are five key outcomes we look to achieve when managing the portfolio¹:

1. Targeting an income of 7%-9% over a cycle
2. Having a better Sharpe Ratio than the MSCI World Index
3. Having a better downside market capture than the MSCI World Index
4. Having 40-45% less volatility than the MSCI World Index
5. Targeting a total return from dividends, option premiums and market appreciations

Looking ahead, while the direction of equity markets is unclear, there is a strong opportunity for the equity premium income strategy. If the market rally continues and expands outside of the few mega-cap stocks (the ‘magnificent 7’), this strategy may be poised 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 elevated levels of income while our defensive and lower beta portfolio should participate in less of the downside. Finally, should we see a choppy market that remains more rangebound, equity premium income strategies may still provide a healthy total return through income generated by the options component.

¹ These targets are the investment manager’s internal guidelines only to achieve the fund’s investment objectives and policies as stated in the prospectus. The targets are gross of fees and subject to change. There is no guarantee that these targets will be met.