My top financial goal is to grow my passive income so that it can eventually cover my monthly expenses. I've made a variety of passive income investments, including dividend stocks, real estate partnerships, and bonds. One of my favorite vehicles for generating passive income is investing in exchange-traded funds (ETFs).

I own several income-focused ETFs, including the JPMorgan Equity Premium Income ETF (JEPI 0.11%). I routinely buy more shares of the ETF, which offers a lucrative monthly income stream. Here's why it's one of my favorite ETFs for passive income.

A premium passive income producer

The JPMorgan Equity Premium Income ETF is an actively managed fund. Its primary goal is to deliver monthly income and equity market exposure with less volatility than the broader stock market. The ETF has certainly lived up to its name over the past year, delivering premium income compared to other yield-focused asset classes.

A chart showing how JEPI's yield compares to other asset clases.

Image source: JPMorgan Asset Management.

As that chart shows, it has delivered nearly as much income as the average U.S. high-yield bond over the past 30 days. Meanwhile, its yield is even higher over the past 12 months at 8.5%. That's more than double the income yield of a 10-year treasury or real estate investment trust (REIT).

The fund makes monthly distribution payments to investors. One caveat is that those payments can vary considerably from month to month.

JEPI Dividend Chart

JEPI Dividend data by YCharts

However, the overall annual yield has been very attractive since the fund's inception.

Even though it's an actively managed fund, it has a very reasonable ETF expense ratio of 0.35%. That low cost enables investors to keep more of the income the ETF generates on their behalf.

How the fund produces premium income

The JPMorgan Equity Premium ETF has a two-pronged strategy to generate income for fund investors:

  • A defensive equity portfolio: The fund's managers use a bottom-up fundamental research process to select high-quality stocks based on its proprietary risk-adjusted stock ranking. Many of these stocks supply dividend income.
  • A disciplined options overlay strategy: The fund's managers write out-of-the-money call options on the S&P 500 Index to generate monthly distributable income.

The fund's defensive equity portfolio currently has more than 100 holdings, led by:

  • Progressive: The insurance company made up 1.7% of the fund's net assets. It pays a 0.5%-yielding dividend.
  • Trane Technologies: The HVAC manufacturing company comprised 1.7% of the fund's assets. It currently pays a dividend yielding 1.1%.
  • Microsoft Corporation: The technology titan made up 1.7% of the portfolio. It pays a 0.7% dividend.
  • Amazon: The e-commerce giant comprised 1.7% of the fund's net assets. It doesn't currently pay a dividend.
  • Meta Platforms: The social media behemoth comprised 1.6% of the fund's holdings. It recently initiated a dividend and currently yields 0.4%.

The fund also holds a few higher-yielding dividend stocks, including top-10 holdings ExxonMobil (3.2%) and AbbVie (3.8%). These holdings provide the fund with dividend income and price appreciation potential.

The other piece of its portfolio is out-of-the-money call options written on the S&P 500. These options generate premium income as they expire each month, which the fund distributes to investors. Option premiums are higher when volatility spikes, so the fund can generate more call option premium income during periods of market volatility. That also helps offset the equity portfolio's volatility.

The fund aims to outperform the S&P 500 total return index by delivering high income returns from the monthly cash distributions and solid value appreciation as the stocks in the portfolio rise. It also aims to achieve those returns with less volatility than the broader market.

An excellent ETF for passive income

The JPMorgan Equity Premium Income ETF has done an excellent job delivering a premium passive income stream to fund investors. While the monthly payment ebbs and flows with the income generated by options and dividends, it has produced a higher yield than most income-focused investments over the past year. Furthermore, it does that while reducing risk and volatility. Those features make it an excellent addition to my passive income portfolio, which is why I keep buying shares of this high-yielding ETF.