You've probably read countless articles telling you that a particular stock, exchange-traded fund, or other investment is a great buy. But with most investments, the answer isn't so clear. For some investors, a particular ETF might be a really smart choice. For others, it might be completely unsuitable.
JPMorgan Equity Premium Income ETF (JEPI +0.54%) has generated considerable debate in the ETF world. Some investors think that the ETF uses an ingenious strategy to produce income for those who need it. Others believe that this strategy gives up more than it pays to shareholders. For me in my exploration of investments for the Voyager Portfolio, I've come to the conclusion that I don't need the JEPI ETF. But your situation is different, and it might be more appropriate for you to consider investing in the fund. Here's why.
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Keeping it simple
JPMorgan Equity Premium Income is an example of an investment that introduces some complex concepts in order to achieve a particular objective. The question every investor has to ask is whether that particular objective is appealing and useful in their particular situation.
First of all, the idea of using a covered-call strategy to generate income is one that options investors are quite familiar with. The most important thing to understand about the strategy is that it doesn't produce free money. You have to weigh carefully how much potential upside you're giving up in the underlying stock in question, and you need to be comfortable with either selling the underlying stock or buying it back at a higher price than you received in your covered-call transaction.
The JEPI ETF goes a step further than most covered-call strategies. Ordinarily, options investors write calls on the securities they own in their accounts. That's as much because brokers typically require it as it is that it keeps things simple. Instead of doing that, though, the JEPI ETF's call-writing exposure is tied to a stock market index.
This creates even more complexity. It's quite possible that if JPMorgan does a poor job with stock selection, the stock portion of the portfolio will underperform the index. However, if the index rises, then the call-writing strategy can create losses of its own even if the stocks the ETF owns didn't actually go up. As a result, there's no guarantee that investors will end up ahead.
I want more control over my investments than that. In my case, I like to keep things simple, and this is definitely not a simple ETF. I also don't need current income, so the covered-call strategy isn't as valuable to me as it would be to an income-focused investor. But even if I were looking for income, I'd be much more likely to tie my call-writing to the stocks actually in my portfolio. That prevents unnecessary confusion and minimizes the risk of nasty surprises.
NYSEMKT: JEPI
Key Data Points
Who might like JPMorgan Equity Premium Income?
The investors who will most like the JPMorgan Equity Premium Income ETF are those who don't want to be responsible for selecting a portfolio of stocks, prefer paying an outside manager to work through complex options strategies to generate income, and value the regular distributions that the ETF makes. That's the case that plenty of investors make. And even though the fund hasn't always outperformed a vanilla stock index ETF, JEPI has made plenty of shareholders happy with smaller losses during down markets and reasonably good overall performance.
So even though the Voyager Portfolio won't be buying shares of JPMorgan Equity Premium Income ETF, you should feel free to use your own judgment. If the benefits of the ETF outweigh the potential risks and downsides, then it might well deserve a place in your own investing portfolio.
