Dividend yields above 6% for your portfolio in a rising interest rate environment
I first discovered the JPMorgan Equity Premium Income ETF (JEPI) after it ranked third in the top 20 actively managed ETFs in terms of net new assets in November 2021. The fund had grossed 506 million dollars in November 2021 alone and since its inception in May. From 2020 through January 4, total assets stood at $ 5.90 billion.
Looking at the reasons for this substantial growth, I saw that JEPI was offering an attractive 8% dividend yield. Now, with an interest rate hike expected in 2022 as part of the Fed’s tightening of monetary policy, we can expect the 10-year T-bill yield to hit 2% this year, up from 1. , 70% currently. Rising rates are also the reason why highly valued and unprofitable growth stocks are suffering from a market downturn, with the NASDAQ Composite falling nearly 2% this week while the Dow Jones Industrial Average is up 1.2%.
In addition, as shown in the figure below, the fund prides itself on offering more dividends than other asset classes.
In researching the reasons for this superior return, I first noticed that the fund charges an expense ratio of only 0.35%, which is halfway between passive index management on the one hand, and active management, on the other hand. In addition, its operational strategy combines stocks with options to strike a balance between return, capital growth and risk. Thus, JEPI seeks to generate a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to providing monthly income.
In order to achieve this goal, the fund managers build a high quality, low beta portfolio of large cap US stocks with less volatile earnings and stock prices based on JP Morgan’s years of experience. Then they sell index options against that long term portfolio and use the premiums to generate income. The result is a rather conservative equity income strategy designed to reduce downside exposure by forgoing some upside participation.
In verifying these claims, I have been tracking dividend yields for JEPI as well as the Bloomberg Barclays High Yield ETF (JNK) SPDR and iShares Global REIT ETF (REET) for comparison. I have also included the Schwab US Dividend Equity ETF (SCHB) as a popular passive and index fund. The results are in the graph below with the superiority of JEPI confirmed.
However, as some would have noticed, the ETF’s return fell from 8% to 6.57% over a six-month period as its peers were much less impacted. This is partly explained by the ETF’s rise of 25.9% since May 2020 (blue graph below), which ultimately means that the yield, which is the dividend as a percentage of the share price, decrease.
In addition, as shown in the orange chart, the monthly dividends paid are on a clear uptrend after being on a downtrend from January to September 2021. This is made possible by the options strategy, which is to sell options to purchase every week to adapt to changing market conditions. conditions as is currently the case. Therefore, with the surge in volatility, JEPI is fulfilling its mandate of providing higher income, thereby giving investors the cushion they need against fluctuations in market prices.
Finally, JEPI makes sense as an innovative source of income covering all sectors (Consumer Staples, Financials, Healthcare, IT, energy, etc.) and avoids the duration risks of high yield bonds (junk bonds). At the same time, he brings invaluable experience of the people, processes, and philosophy of the mutual fund world to ETF management, all at low cost.