JEPI ETF yields 7.9%: Is it a good dividend fund for retirement?

The JPMorgan Equity Premium Income ETF (JEPI) stock has jumped from $48 in April to $56.76 and is hovering near its all-time high of $57.10. 

JEPI ETF has also attracted substantial inflows this year, helped by the ongoing craze of covered call funds that provide the biggest dividend yields in Wall Street. So, is JEPI ETF a good fund to invest in?

How the JEPI ETF works

JEPI is the biggest exchange-traded fund (ETF) in its category of covered call funds, with over $41 billion. It has had net inflows of over $4 billion this year, continuing a trend that has been going on since its inception. 

The JEPI ETF generates its returns in two main ways. First, the team creates a portfolio comprising companies from various sectors. In this case, most of its companies are in the technology sector, followed by financials, healthcare, industrials, and consumer discretionary. 

The biggest companies in the fund are well-known brands like Alphabet, Mastercard, Amazon, Meta Platforms, Nvidia, and Visa. In this case, the company benefits from their performance, which has been in an upward trajectory in the past few years.

JEPI then complements their strong returns by using a strategy known as a covered call, where it initiates a call option trade tied to the blue-chip S&P 500 Index, where all these companies belong.

By doing this, the fund generates an income, through the call option premium, which it then uses to distribute to investors as a dividend. The only limitation is that the options trade limits its opportunity to profit when there is a strong bull run and the strike price is reached.

The JEPI ETF has been highly rewarding to investors as the dividend yield has been over 7.8% since its inception. This is a much higher return than what other funds, including the popular VOO and SPY, offer.

Is JEPI a good buy?

An American investor in the stock market has three main options. First, they can select stock and create a portfolio. This option has worked for many people in the past decade.

The other option is to invest in passive funds that track well-known indices like the S&P 500 and the Nasdaq 100. This option is loved because of its lower cost and the long record of generating strong returns that beat inflation.

The third option is to go for active management, where ETFs like JEPI and JEPQ exist. Investors are moving to funds like JEPI and JEPQ because of the huge sums of returns they provide. 

However, a closer look  shows that those who invest in the S&P 500 Index do better than those who chase its high dividends. According to Bloomberg, JEPI has underperformed the S&P 500 Index by about 58% since its inception when you consider the total return. The chart below shows the three-year total return of JEPI and the VOO ETF.

Indeed, Hamilton Reiner, who runs JEPI, told the publication that its goal was to offer income and minimize volatility, not to maximize returns. As an investor, one should consider an investment that offers a better total return over time.

Worse for JEPI is higher tax inefficiency because the derivative-based payouts don’t get the preferential treatment of qualified dividends. Instead, they are taxed at the ordinary income rate, which is not idea.

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