I love to collect passive income. The more I receive, the less reliant I am on needing to work to cover my expenses. That’s why I strive to add to my passive income streams each month.
One of my many passive income strategies is investing in exchange-traded funds (ETFs) that offer high income yields, like the JPMorgan Equity Premium Income ETF (JEPI 0.23%). I plan to load up on more shares of the ETF in December. Here’s why I like this ETF, which provides more than just income.
Monthly income
The JPMorgan Equity Premium Income ETF has a dual mandate. The fund strives to deliver monthly income to its investors. On top of that, it aims to provide equity market exposure with less volatility.
The fund’s income stream is more lucrative than most fixed-income investments. Its yield over the last 12 months is 8%. For comparison, U.S. high-yield bonds (junk bonds) have offered around a 7% income yield on average. Meanwhile, the yield on high-quality Treasury bonds is less than 4%.
Driving the fund’s high income yield is its disciplined options-overlay strategy. It writes out-of-the-money call options on the S&P 500 Index, meaning they are above the index’s current market price. By selling or shorting options, the fund generates options premium income, with the premium being the price of the option. It gets paid cash for selling the call options, which it gets to keep when the options expire. The fund generates a recurring income stream by writing additional options each month.
That income stream ebbs and flows based on market pricing and volatility (options premiums are higher during periods of greater market volatility). Because of that, the fund’s monthly distributions can fluctuate:
JEPI dividend data by YCharts.
While the payments vary each month, they tend to be relatively lucrative over the course of a year. I’m willing to risk some payment volatility in exchange for a much higher income yield than other asset classes.
Equity upside potential
The JPMorgan ETF offers more than just an attractive passive income stream. The fund also provides equity market exposure with less volatility. It does that by holding a defensive equity portfolio filled with stocks selected based on fundamental research and the fund’s proprietary risk-adjusted stock rankings. It currently has more than 100 holdings, led by:
- Progressive (PGR 0.76%): 1.7% allocation
- Trane Technologies: 1.7%
- ServiceNow: 1.7%
- Nvidia: 1.6%
- Mastercard: 1.6%
While the fund benchmarks its returns against the S&P 500 (and writes call options on the index), it doesn’t strive to match its holdings. It holds fewer stocks and has a more equal-weighted allocation (its top holding, Progressive, is a 1.7% allocation, while Nvidia and Apple lead the S&P 500 at 6.9% each). This strategy can enable the fund to outperform the S&P 500, which it did during the third quarter.
One factor driving its outperformance in the period was a higher allocation to Progressive (1.7% compared to 0.3% in the S&P 500), which added to its results in the period. The insurance company reported a significant improvement in its underwriting results, which boosted its stock price.
The fund also benefited from its higher allocation to Lowe’s compared to the S&P 500. It has a 1.5% allocation compared to 0.3% for the broader market index. The home improvement giant beat its earnings expectations during the quarter, which helped drive its stock price higher.
The fund’s equity market exposure adds to its total return. For example, the ETF has grown a $1,000 investment made at its inception in mid-2020 by about 20% to $1,200. In addition, it has distributed more than $500 in income. That has added up to a 13.6% average annual total return, which is exceptional for an income-focused investment vehicle.
The best of both worlds
The JPMorgan Equity Premium Income ETF pays a lucrative income stream each month. On top of that, it offers equity market exposure with less volatility. That enables me to collect passive income and see some value appreciation. Those two attractive features are why I plan to load up on more shares of the ETF this month.
Matt DiLallo has positions in Apple, JPMorgan Equity Premium Income ETF, Lowe’s Companies, Mastercard, and ServiceNow and has the following options: short February 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Apple, Mastercard, Nvidia, Progressive, and ServiceNow. The Motley Fool recommends Lowe’s Companies and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
