The JPMorgan Premium ETF (JEPI) is one of the top Sleep Well at Night (SWAN) funds on Wall Street. In just a few years, it has grown to become the biggest active ETF globally with over $37 billion in assets under management.
JEPI has also been a strong performer over time, generating total returns of 76% since its inception. It provides regular income, thanks to its monthly distributions of about 7%, and also exposure to some of the top American companies.
JEPI ETF is a SWAN fund
The JPMorgan Equity Premium ETF generates returns by investing in 133 companies in the S&P 500 index. These stocks are selected carefully by portfolio managers with over 60 years of combined experience in the equities market.
Trane Technologies, a company that manufactures heating, ventilation, and air conditioners is the biggest part of the fund. It is followed by companies like NVIDIA, Progressive, ServiceNow, Amazon, Mastercard, Meta Platforms, and Honeywell.
Most of JEPI’s constituents are in the information technology sector, followed by financials, healthcare, and industrials. Therefore, the ETF makes money when these stocks are doing well.
At the same time, it generates returns using the options market, where it writes call options on the S&P 500 index. A call option gives a user a right but not the obligation to buy an asset at a certain price commonly known as the strike price.
By selling these options, the JEPI ETF is able to generate substantial returns, known as premiums, which it distributes to its holders each month. Its dividends also include the payouts made by companies in its portfolio.
Therefore, the JEPI ETF typically does well when the stock market is in an uptrend. However, because the options trade has a strike price, it means that gains could be limited if the S&P 500 index does well as it has done in the past few weeks.
Read more: JEPI, JEPQ, and JPIE ETF scorecard for 2024 so far
Vanguard S&P 500 ETF (VOO) is a better alternative
While the JEPI ETF has done well over time, we believe that the basic VOO ETF is a better alternative for several reasons.
First, VOO is one of the cheapest funds in Wall Street with an expense ratio of 0.03%, which is much lower than JEPI’s 0.35%. This simply means that a $10,000 investment in VOO will cost just $3 annually to manage. A similar investment in JEPI will cost about $35. Sure, these are not big numbers, but why pay more?
Ideally, it would make sense to pay more if the JEPI ETF generates stronger returns than JEPI. However, historical data show that, while the VOO ETF has a dividend yield of just 1.2%, it has a long track record of beating JEPI.
JEPI ETF has had total returns of 15.78% this year, while the VOO has returned 26.7%. Similarly, in the last three years, JEPI’s total returns have been 26.8% compared to VOO’s 33.50%. Therefore, given the choice of these two funds, I would go for one that has a long track record of performance.
Third, VOO is the best SWAN ETFs in my view because of its long track record. It tracks the S&P 500 index, a fund that has been in business since 1957. While the S&P 500 index dips when there are major events like the COVID-19 pandemic and the dot com bubble, it always bounces back.
Therefore, VOO – together with funds tracking the NASDAQ 100 index – are better investments in the long term. Its strong performance helps to offset JEPI’s high dividend yield and monthly distributions.
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