JEPI: Dividend ETF Review

Dividend dream or dividend trap?

March 09, 2023

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“If you want to feel rich, just count the things that money can’t buy.”

Caution: JEPI High Yield

We all love dividends.

It’s no secret that they are one of the most passive forms of income.

Though as a dividend investor, one of the first lessons you learn is to not chase yield (been there done that). So naturally, when the hype began to build around JEPI and its 10%+ dividend my “warning high yield” flag went up.

Is it a dividend investor’s dream, or a dividend investor's trap? Well, what if I said both?

Let me explain.

Background on JEPI

It’s new, like really new. With an inception date of May 2020, this ETF has yet to turn three years old.

The expense ratio sits at 0.35% ($35 in fees on every $10k invested) and its 30-day yield is 10.7% at the time of my writing.

Cruising over the top 10 holdings you will recognize a number of blue chip stocks like Coca-Cola, Abbive, Hershey, and Visa.

Summarizing the approach, JEPI’s goal is to generate income with a combination of selling options and investing in individual stocks. JPMorgan also states that JEPI seeks to deliver a “significant portion” of S&P 500 returns.

“Cade this sounds dope, what’s the catch?”

Hold tight, we’re going deeper.

How It Pays It’s Dividend

JEPI sells options to support its hefty dividend. This isn’t uncommon as other popular high-yielding dividend ETFs like QYLD do the same.

Where JEPI differs is by holding 15%-20% of its holdings in ELNs, or equity-linked notes. What the heck are those? I had to go down a rabbit hole to get a grasp on these, but essentially they are fancy-covered calls.

The important thing to know is by investing in ELNs JEPI exposes itself to certain debt and credit risks. This isn’t a significant issue (yet), but it’s worth keeping in mind.

In more volatile markets, yields will be higher (aka the last 3 years). Under “normal” market conditions JPMorgan says that JEPI should deliver 5% to 8% yields. Remember though, these aren’t guaranteed

“The Fund does not guarantee that distributions will always be paid or will be paid at a relatively stable level.”

JEPI Prospectus

My thing here is I don’t like investing in things that I don’t understand, and ELNs are at the top of that list. If you are an expert on derivative instruments please reply to this email and explain it to me like I’m seven.

Is It Right For You?

If you are okay with the ELN exposure, then it’s time to ask the question “is JEPI right for me.” As with most financial decisions…it depends.

Breaking down the performance of JEPI will make this easier. In its short history, JEPI has lagged the S&P in positive years and outperformed in negative years.

For example, in 2021 VOO returned 28.7% and JEPI returned 21.3% (dividends reinvested). Looking at 2022 though you will see that VOO returned -18% while JEPI only fell -3.5%.

VOO is blue. JEPI is red.

You don’t have to take it from me. This is from JEPI’s prospectus page.

“Because the fund seeks lower relative volatility, the Fund may underperform the S&P 500 Index, particulary in rising markets.”

Hint hint, markets rise consistently over the long term, so you can expect to underperform.

For those near retirement looking for cash flow and not particularly focused on price appreciation, JEPI is worth considering.

If you are a young buck and still have decades of investing ahead of you, sacrificing that appreciation is something to heavily consider. Other dividend funds like SCHD and DGRO offer both price appreciation and dividend growth.

Conclusion

JEPI isn’t a dividend trap, but I wouldn’t call it a dividend dream either.

My personal plan right now is to avoid JEPI simply because I will be investing for the next 30+ years. For the right person though, that monthly dividend will hit nicely.

Hope you found this helpful, feel free to send me a reply about your thoughts on JEPI.

Appreciate you being a reader, Cade.

Cade's Finds

Stock Market For Beginners - Nate O’Brien put together a detailed video on how to start investing step-by-step in 2023.

Portfolio Visualizer - Great tool to backtest the performance of any portfolio (I used it for this post).

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Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email don’t hesitate to send me a reply.