The JPMorgan Equity Premium Income ETF (JEPI) has become a top fund for dividend-focused investors. Its dividend yield has jumped to 11%, much higher than US bonds, while its assets under management (AUM) have surged to over $40 billion. Let’s explore why the low-yielding Vanguard S&P 500 Index (VOO) is a better buy.
How the JEPI ETF works
The JPMorgan Equity Premium Income ETF is the biggest player in the covered call industry. Its goal is to provide investors with regular monthly dividends that exceed those offered by traditional ETFs.
JEPI also hopes to provide a price return when the US stock market rises. It does this by investing in 135 large companies across most sectors like technology, materials, and financials.
All its companies are members of the S&P 500 Index and include popular names like NVIDIA, Microsoft, Oracle, and Meta Platforms. Other large constituents of the fund are Analog Devices, Trane Technologies, Mastercard, and Visa.
By investing in these blue-chip companies, JEPI hopes that it will rise as their stocks jump. JEPI differs from other similar ETFs in that it is actively managed, with the portfolio managers selecting the names to include in it.
JEPI is also different from other similar funds in that it does not track a specific index. For example, the popular JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) tracks the Nasdaq 100 Index.
JEPI generates its income by selling call options tied to the S&P 500 Index. A call option is a financial transaction that gives users a right, but not the obligation, to buy an asset at a future price.
By selling the call option, the company receives a premium payment, which it uses to distribute to its investors as a dividend. The call option ensures that the fund takes advantage of the fund if its price rises to some point. It then misses the rally if the index rises and crosses the strike price.
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Why the VOO ETF beats JEPI
Many investors purchase the JEPI ETF due to its high dividend yield, which is significantly higher than that of the S&P 500 Index. The fast-growing VOO ETF yields just 1.25%, much smaller than JEPI’s 11%.
However, there are three main reasons why the VOO ETF is a better buy than JEPI. First, it is one of the cheapest ETFs in Wall Street with an expense ratio of just 0.03%. This ratio means that a $10,000 investment costs just $3 a year to maintain. JEPI has a ratio of 0.35%, costing a similar investment $35. These costs can add up over time.
Second, VOO ETF has a long track record of performance. It tracks the S&P 500 Index that has been in the industry for decades. As such, investing in the fund has less risks than in JEPI, which was created a few years ago.
Further, while JEPI’s dividend yield is bigger than VOO, the reality is that the latter generates better total returns. A total return is a metric that adjusts the price return of an asset to dividends.
In this case, JEPI ETF has had a price return of just 0.28% in the last three years, while VOO has jumped by 56%. When adjusted to dividends, VOO has risen by 63%, while JEPI has jumped by 30% in the same period.
The same trajectory has happened this year, with the VOO ETF rising by 3.88% and JEPI falling by 2%. JEPI’s total return this year is just 1.63%, while VOO is 4.24%.
Therefore, while JEPI has a bigger dividend yield than VOO, its total return is much smaller than VOO.
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