How 'old' are JEPI and JEPQ?
Jepi isn’t an old fund. 3-4 years maybe?
But it’s a fairly predictable fund specifically designed for income focused investors who want low volatility and a monthly income.
What is it?
135 stocks out of the sp500. J.P. Morgan analysts picked out 135 companies in different sectors out of spy500 which they believe have better earnings, growth, dividends out of their peers.
The real world difference between a 500 individual stock portfolio and a diversified across multiple sectors 135 individual stock portfolio isn’t actually much. Literally i think there’s some data that shows that you can hold 30-40 stocks in different sectors and get close to market returns. I mean….dow jones is literally 30 companies and over the course of 40 years it has had a 2783% return vs sp500 that has had 2623% return. Pretty much similar returns and correlation.
So 135 individual stocks from sp500 is as good as holding 500. Which is also why sp500 has a 99 percent correlation with vti which is some 3700 stocks.
What’s the secret sauce? And why is it so predictable
Cash covered calls plus dividends yield which gives monthly income ~ 6-8 percent annualized. In fact, slightly out of the money cash covered calls so you participate in some upside of the markets as well. It’s not designed to outperform the sp500. It’s designed for low volatility and monthly cash flow, specifically for a person seeking monthly cash flow.
The age of the fund doesnt matter. I can understand and conceptualize the future return based on the fund construction. The performance of the fund depends on what the market will do in the future: 3 outcomes only.
1) If spy goes on a massive bull run - the fund will underperform. It will spin off its usual 6-8 percent yield and stock value will go up, but not as much as SP500 which went on a massive run. Cash covered calls limit upside, while protecting downside. So your upside is limited to the amount of premium plus however much out of money the cash covered calls are. So a year where spy returns 30 percent, jepi will definitely not do that.
Regardless, stocks going up are not what retirees worry about. Whether they hold jepi or spy, the rising prices and the positive sequence of return will mean dying with significantly more than what you had at retirement.
2) second possible outcome. the next 30 years spy remains flat. Decades of no returns. Jepi will significantly outperform spy. Spy has had 2 historical decades with negative returns - 2000s and 1930s and 4 decades of mediocre 4-6 percent returns (1880s, 1890s, 1910s, 1970s). I don’t know what the future holds, but all i can say is that the current shiller inflation adjusted p/e ratio sits at 30 when the historical average is 17.
But if spy returns are stagnant over decades, jepi will outperform significantly because it will continue to spin off a 6-8 percent return from cash covered calls.
This is one of the scenarios where a retiree benefits, doesn’t have to sell their equity. They just keep using their dividend and premium cash flow to live.
3) the third option is a Japan like event, decades of negative return. This will actually result in huge volatility spikes. Jepi premiums will actually increase, you will again outperform spy500 as the cash covered calls will mitigate the losses, keep shooting out premiums, which you could continue living on, while not actually selling shares. Jepi will again outperform sp500 significantly in this situation.
Outcome 2 and 3 is the biggest risk to a retired person. Jepi mitigates that risk. Your risk with jepi is limited upside and underperformance when the market outperforms. That’s the definition of a cash covered call.
So….if i had 0 income and 4 million in assets and i didn’t have absolute comfort doing options myself, then i would put 4 million in jepi. If i did that today, id get about 280k a year just in dividends/premium income, which is actually going to be a fairly reliable income stream even if markets are dropping as that’s when premiums actually go up.
Volatility hit a 20 year low last week. Yet jepi 30 day sec yield is still 6.8 despite historically low volatility (so minimal premiums and not the best time to be selling puts or calls).
It’s a brilliant modern way to maximize income for the retired investor and minimize volatility. Which is why it’s grown to 28 billion of assets under management in 3 ish years.
