Introduction
2023 was a year that took many by surprise, including myself.
The S&P 500 Index (ARCA:SPY) returned a total of 26.3% — carried higher by the outperformance of the Magnificent Seven. However, this 26.3% total return didn't come without a fair share of volatility — as the S&P 500 Index fell -10% over a three-month period during the latter half of 2023.
With that being said, there are many investors (including myself) who would prefer a more stable and predictable return — with income in mind.
In this post, I'm going to compare the total return of the three most popular S&P 500 Index covered call ETFs in an effort to better understand why the JPMorgan Equity Premium Income ETF (ARCA: JEPI) performed so poorly in 2023 — as well as make a prediction for 2024.
2023 In Review
If you're an income investor like me, your portfolio is anchored by covered call ETFs that are benchmarked against the total return of the S&P 500. Unfortunately, 2023 proved not every S&P 500 covered call ETF is made equal.
Now, before you all come after me with comments like "You can't compare JEPI to the S&P 500 Index! JEPI doesn't hold the same stocks, it's a completely different strategy!"
You're right. However, the fund's investment objective as shared in their summary prospectus states the following:
"The investment objective of the Fund is to seek current income while maintaining prospects for capital appreciation.
The Fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the Fund's primary benchmark, the Standard & Poor's 500 Total Return Index (S&P 500 Index)..."
And as shown here on Morningstar, JEPI's benchmark index is the S&P 500.
Now that we're all on the same page, let's dive into the numbers, starting with JEPI.
JPMorgan Equity Premium Income ETF Facts
The total return of JEPI in 2023 was 9.8%, capturing only 37% of the total return of the S&P 500 index.
As we all know, the S&P 500 Index was led higher in 2023 by the Magnificent Seven — seven stocks JEPI's fund managers understandably decided to leave out of the fund's holdings throughout the year. Only two of those seven names, Microsoft Corporation (NASDAQ: MSFT) and Amazon.com, Inc. (NASDAQ: AMZN), were held by the fund in 2023.
As stated in the summary prospectus, "The Fund seeks a lower volatility level than the S&P 500 Index." JEPI certainly achieved this, as the price of their shares only slipped -7.8% during the -10% drawdown the S&P 500 experienced between the months of August and October of 2023. And when you add monthly distributions to that figure, risk-averse investors become increasingly happier — a win in my book.
However, it's equally as important to ask yourself the question "Is the return I see the return I get?"
JEPI uses Equity Linked Notes (ELNs) to generate monthly income for their investors. In the eyes of the IRS, the income generated by these ELNs are taxed as ordinary income — meaning after taxes, this 9.8% figure might be materially lower for some folks depending on their tax brackets.
As a fellow JEPI investor, I'm constantly weighing my opportunity cost. By choosing JEPI over the next best thing, I'm capturing only 37% of the S&P 500's total return. Sure, I'm doing so in an effort to smooth out the volatility of my portfolio while also generating monthly income — but ...Full story available on Benzinga.com
Benzinga
