I keep track of the income-focused investments other writers recommend across the Internet. It is interesting to see what they report when one of my Dividend Hunter recommendations becomes a “hot idea” in the financial press.

Recently, at least a half dozen writers on Seeking Alpha have written (mostly positive) articles about one of these recommendations.

And I don’t blame them. Let me show you why I like it so much for generating income in my investment portfolio…

I’m talking about none other than JPMorgan Equity Premium Income ETF (JEPI). The fund launched in May 2020, and since that time, it has grown to be one of the ten largest actively managed ETFs.

I added my first covered call ETF to the Dividend Hunter portfolio in July 2020. I added JEPI a year later, in July 2021. Seeing a fund that my subscribers have owned for more than a year and a half get “discovered” by a broader audience is fun.

Covered Call ETFs use an option selling strategy (covered calls) to generate income from an underlying portfolio. Many investors use covered call trading to generate cash income from their stock portfolios. At the institutional level, such as with JEPI, the portfolio managers has access to advanced, synthetic securities that more efficiently mirror a covered call trading program. The JP Morgan website includes the below in describing its JEPI strategy:

  • Defensive equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings.
  • Disciplined options overlay implements written out-of-the-money S&P 500 Index call options to generate distributable monthly income.

JEPI sports a current SEC yield of 11.77%. Covered call selling generates attractive cash income with the trade-off of capping potential gains. I like to look at potential returns with different market scenarios.

  • A well-managed covered call strategy should outperform the underlying portfolio in a flat to slowing-rising stock market. Selling out-of-the-money calls gives some capital appreciation potential and income from selling options.
  • In a falling market, a covered call strategy won’t magically produce positive returns, but it will limit the damage. For example, in 2022, the SPDR S&P 500 Trust ETF (SPY) lost 18.8%, and JEPI posted a negative 3.54% return. The fund gave almost 15% better return.
  • A covered call ETF will not keep up in a rapidly rising bull market. In 2021, SPY returned 30.6%. For the same year, JEPI returned 21.5%.

For my Dividend Hunter service, I use JEPI and other variable dividend investments to provide some higher-yielding balance to the stable dividend payors in the portfolio. I always emphasize that proper portfolio management offers more stability and better returns than focusing on individual investment ideas. I have found JEPI to be one of the best covered call ETFs.

— Tim Plaehn

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Source: Investors Alley