Investing in exchange-traded funds (ETFs) can be a great way to generate truly passive income. They enable you to invest in a portfolio of income-generating assets you don't have to manage. Instead, you sit back and watch the passive income flow into your account.
The JPMorgan Equity Premium Income ETF (JEPI 0.27%) offers a premium income stream. The ETF has provided investors with an enticing 8.5% income yield over the past 12 months. It can turn a $1,000 investment into $85 of annual passive income at that rate. Here's a closer look at how the ETF can generate such a generous income stream for its investors.
NYSEMKT: JEPI
Key Data Points
A dual approach to generating income
The JPMorgan Equity Premium Income ETF has a simple mandate. It aims to deliver monthly income to investors and equity market upside exposure with less volatility than the broader market. The actively managed fund employs a two-part strategy to deliver on this objective.
The fund holds a defensive portfolio of stocks. It uses a bottom-up fundamental research process to select stocks based on its proprietary risk-adjusted rankings. The portfolio currently has more than 100 stocks, led by:
- Trane Technologies (1.7% of its net assets)
- Progressive (1.7%)
- Amazon (1.6%)
- Microsoft (1.6%)
- Mastercard (1.6%)
The fund has a very balanced approach, meaning it doesn't have a large concentration of top holdings like the S&P 500 Index. For example, the S&P 500's top ten holdings comprise nearly a third of its value, while this ETF's top 10 holdings are only about 15% of its net assets.
While many of the stocks held by this ETF pay dividends, they're not its primary income source. The second leg of the ETF's strategy is a disciplined options overlay of writing out-of-the-money call options on the S&P 500 Index. Writing call options enables the fund to generate options premium income each month to distribute to fund investors.
A premium income stream
The ETF's strategy has paid dividends for investors over the past year. Its trailing 12-month dividend yield is 8.5%, while its most recent payout put its yield just above 7%. That's significantly higher than investors could earn on other asset classes:
Image source: JPMorgan Asset Management.
As that chart shows, the ETF has delivered a much higher yield than the S&P 500, the 10-year treasury, and REITs. Meanwhile, it has kept pace with high-yield bonds (i.e., junk bonds). Even at that lower 30-day rate, the ETF would produce more than $70 in annual income for every $1,000 invested.
The yield fluctuates because the ETF's distributions vary from month to month based on the income it generates from options premiums and dividends:
JEPI Dividend data by YCharts
That variability is something investors need to keep in mind. They can't bank on receiving a consistent income stream each month. However, they should earn an attractive payout over the course of a year.
Market volatility drives the variability in the monthly distribution. However, in this case, volatility is a positive. Options premiums are higher when the market is more volatile. That should enable the fund to generate more options premium income to distribute to investors in subsequent months.
Another great aspect of the JPMorgan Equity Premium Income ETF is it charges investors a very reasonable ETF expense ratio of 0.35%. That's a very competitive rate for an actively managed ETF. Because the fee is reasonably low, investors get to keep more of the income the fund generates.
A premium passive income producer
The JPMorgan Equity Premium Income ETF lives up to its name, providing investors with a premium passive income stream. While the monthly income payment fluctuates, it has been significant over the past year. That makes it an attractive option for investors seeking a well-above-average income stream.
