JP Morgan AM’s premium income ETF: A tactical asset allocation tool

Global equity version of JPMAM’s $32bn premium income ETF

Theo Andrew

Markets graph performance

Covered call ETFs have officially announced themselves in Europe with the likes of Global X and First Trust launching different versions over the past year.

The JPM Global Equity Premium Income UCITS ETF (JEPG) is the latest in a flurry of buffer ETFs to hit the European market as issuers look to replicate the success of their US-listed ETFs on the continent.

Launching in December last year, JEPG is a global equity version of the issuer’s hugely popular US-listed JPM Equity Premium Income ETF (JEPI), a US equity strategy that has amassed $32bn assets under management (AUM) since launching in May 2020.

Listed on the London Stock Exchange and Euronext Milan, JEPG has a total expense ratio (TER) of 0.35%.

The ETF aims to deliver a consistent income of 7-9% a year with less volatility versus its index – the MSCI World – and is designed to provide higher income during spikes in volatility to cushion investors against fluctuating prices.

Income will then be generated by selling call options on the S&P 500 and MSCI EAFE – developed markets outside the US and Canada – against JEPG’s portfolio.

However, with covered call strategies known to cap performance on the upside, what role does JEPG play in investors’ portfolios?

An expensive low volatility alternative…

Low volatility ETFs also look to protect investors during periods of market turbulence, but without the income generated by selling covered calls.

Dan Caps, investment manager at Evelyn Partners, believes while the underlying investment strategy is similar to other low-volatility strategies, the use case is not the same.

“Low volatility is intended to allow investors to participate in equity returns while looking to manage some of the volatility that comes with this. For long-term investors the uncapped upside is likely to be a greater incentive than the additional income earned,” he said.

“The call options [of JEPG] have a term of one month with an average ‘out-of-the-moneyness’ of 2% – you only need to look at the last months of 2023 to see what impact this sort of capped upside can have on your overall return.”

This capped upside is particularly clear in periods of strong market performance. JPMAM’s US-listed JEPI – a similar strategy but for US-listed equities – returned 9.9% in 2023 versus 26.3% of the S&P 500.

However, JEPI achieved its intention in 2022, returning 1.7% in a year where the S&P 500 booked losses of 19.4%.

Caps added these are the occasions JEPG could be used to express a tactical view.

“If you think the markets will range-trade sideways without too much volatility, the additional return provided by the options premium starts to look very attractive, and it would also provide some comfort in a falling market,” he said.

…or safer high yield bond play?

Upon launching the ETF, JPMAM said JEPG can “complement or substitute” existing yield-paying strategies, offer a conservative equity exposure and act as an alternative source of income to high-yield bonds with equity instead of duration risk.

Caps added most investors would be interested in JEPG as a high-yield alternative.

“Most investors in the ETF will be looking at the yield figure, and this presents an alternative to the high-yield bond market,” he said.

“Those targeting a certain level of income who have only been able to achieve this though a small number of asset classes previously may well embrace the opportunity to diversify their portfolio into a defensive equity allocation.”

Recent elevated bond yields could mean investors prefer to generate their income by avoiding volatility in equities, albeit with the elevated rate risk of fixed income.

The capped upside could also deter investors. “For this reason, I do not think it will appeal to long-term by-and-hold investors looking for capital appreciation,” Caps said.

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