JP Morgan Asset Management (JPMAM) launched two US premium income strategies that have sparked polarised opinions on their merits among fund selectors.
The JPM US Equity Premium Income Active UCITS ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income Active UCITS ETF (JEPQ) debuted on the London Stock Exchange (LSE) last week as UCITS iterations of the hugely successful US strategies that have amassed a combined $54bn assets under management (AUM).
Fund selectors are divided on the value of these strategies. Some argue that similar results can be achieved by adjusting allocations across core asset classes.
Other more income-focused, risk-averse investors appreciate their merits, especially given the sustained market volatility this year.
Each ETF uses an options strategy managed by JPMAM’s US Core team, led by Hamilton Reiner. The team generates income by selling weekly index options on JEPI and JEPQ’s equity portfolios, with monthly distributions to investors from option premiums and dividends.
The yields are generous, with JEPI offering an expected yield of 7–9% a year, while JEPQ sits slightly higher with an expected yield of 9–11%.
Active options-based ETFs have remained in the headlines through 2024, following the JPMAM launch of the JPMorgan Global Equity Premium Income Active UCITS ETF (JEPG) launched last year.
Against a backdrop of intensifying active ETF demand, we spoke to fund selectors for their views of JPMAM’s two new strategies.
Missing US tech gains
For investors seeking to capture sharp gains in the US equity market – particularly with the strong performance of the tech sector, Peter Sleep, investment director at Callanish Capital, noted investors may have to look elsewhere. “These covered call ETFs generate income by selling some of the upside in the underlying shares and taking income,” Sleep explained.
“Many European investors invest in the US … because of the great performance of the US equity market. By buying these ETFs they are surrendering a lot of that upside,” he added.
Sleep concluded most investors buy the tech-heavy NASDAQ for its capital gain potential, “so it is unclear why they would want to sacrifice that upside by selling call options.”
Echoing his views, Stephan Kemper, Chief investment strategist at BNP Paribas Wealth Management said, "If you are confident about the market, capped upside products are the very least vehicles you want to look at.”
But lower volatility makes trade-off worthwhile
Conversely, Nathan Sweeney, CIO of multi-asset of Marlborough, said many investors see this as an acceptable trade-off given the consistent yield, which ranges between 7-11% for the two ETFs.
“In the long term, these funds can perform competitively by capturing modest equity gains while cushioning downside risks.”
“This type of approach works well for income-focused or risk-averse investors, particularly those who want exposure to the US equity market but prefer a strategy that smooths out returns,” he added.
Kemper said for those with a shorter time frame who still want some exposure to equities with a bit of protection, this approach could make sense.
“Additionally, if someone feels particularly confident about the markets, these kinds of products could provide value to a portfolio.”
The final word
Ultimately, fund selectors remain in separate camps on the merits of JEPI and JEPQ. Sleep believes that investors can simply adjust their weightings across equities, bonds and cash to achieve the downside protection they need.
“I hope most investors will avoid,” he said.
Meanwhile, Sweeney said the popularity of the US versions of these ETFs highlights strong demand for income and added many European investors are also embracing income-focused strategies traditionally favoured in the US.
“Given the growing awareness of alternative yield-generation methods and a continued push for diversified income, it is likely that we will see increasing adoption of covered call strategies in Europe, especially among those who prioritise consistent cash flow over full upside capture,” he concluded.
