{"id":61721,"date":"2023-09-16T07:20:25","date_gmt":"2023-09-16T11:20:25","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/jepi-tsly-what-a-50-yielding-etf-can-teach-income-investors-nysearcajepi\/"},"modified":"2023-09-16T07:20:34","modified_gmt":"2023-09-16T11:20:34","slug":"jepi-tsly-what-a-50-yielding-etf-can-teach-income-investors-nysearcajepi","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=61721","title":{"rendered":"JEPI & TSLY: What A 50% Yielding ETF Can Teach Income Investors (NYSEARCA:JEPI)"},"content":{"rendered":"
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The JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI<\/span>) is the gold standard of covered call ETFs for a few key reasons, which we’ll cover in this article.<\/p>\n

I’ve also been comparing JEPI to challenger ETFs like DIVO and SPYI, both requests from Dividend Kings members to see if either challenger could unseat the king of ultra-high-monthly yield.<\/span><\/p>\n

Today I’m presenting a unique article, which is both a comparison article and a warning to retirees who love covered call ETFs.<\/p>\n

A Dividend King member recently asked me about the YieldMax TSLA Option Income ETF (NYSEARCA:TSLY<\/span>). At first glance I thought this ETF was so absurd that no one would bother buying it.<\/p>\n

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Ycharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

It turns out that a 50% yielding ETF can indeed attract a lot of people.<\/p>\n

So to help teach retirees and anyone else attracted to covered call ETFs, how to do it safely, today I present JEPI & TSLY: What A 50% Yielding ETF Can Teach Retirees about covered call investing.<\/span><\/p>\n

Lesson One: What These ETFs Own<\/h2>\n

JEPI is run by two option pros with about 60 years of cumulative experience.<\/p>\n

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JPMorgan Asset Management<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

They take a diversified portfolio of about 110 blue-chip stocks, screened for quality and earnings stability, and then use a unique option strategy to generate income off just 15% of the portfolio.<\/p>\n

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JPMorgan Asset Management<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

These are exchange-linked notes or ELNs on 15% of a blue-chip portfolio, a more complex strategy than simple covered calls.<\/p>\n

But JEPI is designed to be a single ticker retirement solution, combining quality companies with strong long-term option income to try to earn 6% to 10% returns, or about 80% of the S&P’s underlying return.<\/p>\n

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JPMorgan Asset Management<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

JEPI is also designed to achieve about 35% lower volatility than the S&P, which it managed to do in 2022. Which is why it was such a Wall Street darling and attracted such monster inflows last year. In 2022 JEPI soared from $7 billion in AUM to $17 billion, one of the top 10 ETFs of the year.<\/p>\n

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Ycharts<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Coveraged calls are basically when you act as an insurance company for someone who is worried that a stock’s price might fall.<\/p>\n

Anyone can write covered calls and they are flexible and usually not held until maturity.<\/p>\n

ELNs are the realm of the institution, special contracts linked to the price of stocks, indexes, or baskets of stocks.<\/p>\n

These are usually held until maturity and can create stronger leverage, which is why JEPI is able to generate such strong income from a 1% to 2% yielding basket of stocks, while only writing ELNs against 15% of the portfolio.<\/p>\n

Basically, JEPI uses an advanced form of option leverage in exchange for counterparty risk.<\/p>\n

In the very unlikely event of another financial crisis, when JEPI’s goal of 35% less volatility than the S&P would be most useful, JEPI’s income could theoretically tank.<\/p>\n

Note that the counter parties JPMorgan is working with are companies like Citigroup, Bank of America, and Goldman Sachs. They are not going to fail, and if they ever do, we’ll all have bigger problems than our portfolios.<\/p>\n

So what about TSLY? It’s part of the yieldmax family of ETFs, that use options to try to generate max income with maybe a bit of gains in the underlying stocks as well.<\/p>\n

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YieldMax<\/p>\n<\/figcaption><\/figure>\n

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YieldMax<\/p>\n<\/figcaption><\/figure>\n

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YieldMax<\/p>\n<\/figcaption><\/figure>\n

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YieldMax<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Some of these are so new they haven’t started paying distributions yet. But you can see how 14% to 48% yields on high volatility stocks like big tech can be very enticing to an income focused investor.<\/p>\n

Each of these YieldMax ETFs is designed to own just one stock and write calls against it.<\/p>\n

Lesson Two: How These ETFs Make Money<\/h2>\n

JEPI is designed to be sustainable and try to generate as much sustainable income as possible over years. Management is writing ELNs targeting a 5% to 8% yield.<\/p>\n

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JPMorgan Asset Management<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

You can see how the rolling monthly income is pretty stable around 12 basis points or 0.12% per month for the last three months.<\/p>\n

You can also see how the vast majority of the income JEPI is paying out is coming from the ELN income. That has been steadily falling since volatility peaked in October, so far the bear market bottom.<\/p>\n

A steady fall in volatility has resulted in insurance premiums for stocks declining though JEPI’s annualized June income still works out to 8.2%.<\/p>\n

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JPMorgan Asset Management<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

That’s what the average option premium has been since 2008. If this last 15 years of volatility data is representative of the future (it’s 91% likely to be) then JEPI could generate long-term returns:<\/p>\n