I'm on a mission to grow my passive income to the point where it can cover my basic living expenses. That would lift a huge weight off my shoulders because I'd no longer have to work to cover my family's financial needs.
I still have a long way to go. However, I'm making progress as I put more cash to work in income-generating investments. One that I've been piling into is the JPMorgan Equity Premium Income ETF (JEPI 1.35%). Here's why I think it's a great way to generate passive income.
An active income strategy
JPMorgan Equity Premium Income ETF is an exchange-traded fund (ETF) with a dual mandate. It "seeks to deliver monthly distributable income and equity market exposure with less volatility." The fund aims to achieve its goals through a two-pronged investment strategy:
- Defensive equity portfolio: It holds a portfolio of stocks selected based on its proprietary risk-adjusted stock rankings.
- Disciplined options overlay: The fund writes out-of-the-money (i.e., above the current market price) call options on the S&P 500 index to generate income it distributes to investors each month.
That second aspect of its investment strategy enables it to produce passive income for its investors. The ETF's managers write or sell short call options on the S&P 500 at a higher price than its current trading level. This strategy generates income because the option writer is paid the value of the option (i.e., premium).
If the S&P 500 closes below the written option's strike price at expiration, the fund gets to keep the entire premium as income. Meanwhile, if the S&P 500 closes above the strike price, the fund can cover the short option (at a profit or loss depending on the price) and write a new one expiring in a different month to generate additional income.
A prodigious income stream
The options premium income generated by this fund really adds up. Its latest payment has an annualized yield of nearly 7.1%, while distributions over the past 12 months put its income yield at 7.3%. That yield compares very favorably to other asset classes:
Image source: JPMorgan. REITs = real estate investment trusts.
As that graphic shows, only U.S. high-yield bonds (i.e., junk bonds) have delivered a higher yield. However, those bonds have a much higher risk profile, especially compared to 10-year U.S. Treasury bonds. It's also important to note that while bonds provide a fixed-income stream, this ETF's monthly distribution payments vary (sometimes significantly):
JEPI Dividend data by YCharts.
The payment fluctuation results from the changing value of options premiums, which tend to rise and fall based on stock market volatility. The more volatile the market, the higher the options premium. As a seller of options, the fund stands to generate more income during periods of higher market volatility.
More than just income
One other thing I like about this fund is its equity market exposure. The ETF's share price rises as the value of its stock holdings increases. That enables investors to potentially earn even higher total returns than the passive income provides.
The ETF has produced a 13.4% total return over the past year and a 12.8% annualized return since its inception in the middle of 2020. Put into a different perspective, the fund has grown the value of $1,000 invested at its inception to nearly $1,200. Meanwhile, the total return is almost $1,800 after adding in the income distributions. This equity-like return from an investment that produces income that outperforms most fixed-income options makes it a great fund to build wealth while collecting passive income.
A great option to boost my passive income
JPMorgan Equity Premium Income ETF produces a prodigious amount of passive income, so I continue to pile into the fund as I seek to grow my passive income sources. It also offers some equity market exposure, which is a nice bonus because it will help increase the value of my investment over time.
