Exploring the JPMorgan Equity Premium Income ETF: A Stream of Passive Income

Passive income offers financial freedom, allowing individuals to reduce dependency on regular employment. Maximizing these streams monthly is essential.

A key strategy in my portfolio is investing in exchange-traded funds (ETFs) that provide attractive yields. A standout is the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), which I plan to increase my investment in this December. Here’s an overview of why I choose this ETF for more than just income.

Consistent Monthly Income

The JPMorgan Equity Premium Income ETF is designed to deliver monthly income while providing equity market exposure with reduced volatility. This fund’s income outpaces typical fixed-income investments.

Over the last year, the ETF has achieved an impressive 8% yield. In contrast, U.S. high-yield bonds, often referred to as junk bonds, have yielded around 7%. High-quality Treasury bonds, on the other hand, yield less than 4%.

The fund’s robust income is primarily due to its disciplined options-overlay strategy. The ETF writes out-of-the-money call options on the S&P 500 Index, selling options priced above the current market level. This approach allows the fund to generate income from options premiums. When these options expire, the fund retains cash from the sales. By offering more options each month, it creates a reliable income source.

It’s worth noting that market conditions can affect this income stream. Options premiums tend to increase during market volatility, causing the fund’s monthly distributions to fluctuate:

JEPI dividend data by YCharts.

While monthly payments can vary, they tend to be substantial over the year. I’m comfortable with some volatility in exchange for greater income potential compared to other investments.

Potential for Capital Appreciation

Beyond its monthly income, the JPMorgan ETF offers investors exposure to the equity market with reduced volatility. The fund maintains a defensive portfolio with stocks selected through fundamental research and a proprietary risk-adjusted ranking system. Currently, it holds more than 100 stocks, including:

• Progressive (NYSE: PGR): 1.7% allocation
• Trane Technologies: 1.7%
• ServiceNow: 1.7%
• Nvidia: 1.6%
• Mastercard: 1.6%

While the fund benchmarks its performances against the S&P 500, its objective is not to exactly mirror the index’s holdings. The ETF has fewer stocks and has a more balanced allocation. In fact, its largest holding, Progressive, is allocated at 1.7%, compared to Nvidia and Apple, each at 6.9% within the S&P 500. This differentiation helped the fund outperform the S&P 500 in the third quarter.

A notable contributor to its success was a larger allocation to Progressive (1.7% vs. 0.3% in the S&P 500). The company reported strong underwriting results, which positively affected its stock price.

High allocation to Lowe’s, at 1.5% compared to the S&P 500’s 0.3%, also drove performance. Lowe’s exceeded earnings expectations, bolstering its stock value.

The fund’s total returns have been promising. An investment of $1,000 made when the ETF began in mid-2020 has appreciated to about $1,200, along with over $500 earned in income, resulting in a 13.6% average annual total return—remarkable for an income-oriented investment.

The Perfect Combination of Income and Growth

The JPMorgan Equity Premium Income ETF not only provides substantial monthly income but also allows for equity market participation with less volatility. This combination is why I plan to purchase more shares of this ETF this month.

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Matt DiLallo is invested in Apple, JPMorgan Equity Premium Income ETF, Lowe’s Companies, Mastercard, and ServiceNow, and he has various options positions. The Motley Fool also holds stakes in, and recommends, Apple, Mastercard, Nvidia, Progressive, and ServiceNow. It advises investing in Lowe’s Companies as well. The Fool follows a strict disclosure policy.

The views and opinions expressed herein belong to the author and do not necessarily reflect those of Nasdaq, Inc.