One Of Jpmorgan's Most Popular Income Etfs Is Losing Ground To Its Sister Fund

The JPMorgan Premium Equity Income ETF (JEPI) has gained significant popularity among investors seeking cash generation during a period of high inflation. However, it may soon be overshadowed by its younger counterpart. With a yield surpassing 10% for most of the previous year, JEPI attracted substantial inflows, reaching approximately $26 billion in total assets in 2023.

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While the fund outperformed the broader market in the past 12 months, new investors have not experienced high-end returns in 2023. As of May 11, the fund's year-to-date total return stands at a modest 3.4%, underperforming the S&P 500. Furthermore, the 30-day SEC yield has dipped below 10%. In contrast, JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), the fund's sister product, has been a major success for investors, boasting a return of over 17% this year and a 30-day SEC yield of nearly 14%, attributed to the outperformance of Nasdaq stocks compared to the S&P 500.

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Hamilton Reiner, the portfolio manager for both funds at JPMorgan Asset Management, emphasizes that the underlying assets associated with the index linked to each fund have contributed to their respective performances. JEPQ, launched in May 2022, has accumulated over $2 billion in assets and has garnered considerable investor interest.

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Both JEPI and JEPQ operate using a similar approach, combining active stock selection with equity-linked notes. These notes generate income for the funds but can limit upside potential during significant market rallies. The structured notes function in a manner resembling a covered call strategy.

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JEPI, linked to the S&P 500, holds a more defensive portfolio with no single stock constituting more than 2% of the fund's holdings. On the other hand, JEPQ has significant exposure to tech stocks that have excelled in 2023.

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Reiner emphasizes that stock selection plays a crucial role, focusing on long-term winners and slightly overweighting them. However, given the highly concentrated nature of the Nasdaq index, the funds maintain some holdings in stocks that are considered less favorable. The difference lies in being underweight on the latter in JEPQ.

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JEPQ's equity-linked notes are tied to the more volatile Nasdaq-100, enabling the fund to generate greater income, thus boosting its yield while capturing more of the market's upside potential. Reiner explains that the increased volatility allows for more potential upside and income through the sale of farther-out-of-the-money calls. He expects the fund's yield to range between 9% and 11% in the long term.

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The success of JEPQ indicates investor appetite for a conservative approach to gaining exposure to Nasdaq growth stocks. Reiner highlights that the strategy aims to provide both income and total return, catering to investors who seek a combination of both aspects.

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