The JPMorgan Equity Premium ETF (JEPI) has jumped to a record high this year, helped by the strong performance of American stocks. JEPI soared by 18% from its August lows. So, is this high-yield ETF a good alternative to the S&P 500 Index and its ETFs like VOO, IVV, and SPY?

JEPI ETF has become a juggernaut by promising high yields

The JPMorgan Equity Premium ETF is the biggest covered call fund with over $40 billion. Its inflows have jumped by over $4 billion this year because of the promise of higher dividend yield. 

The fund has a dividend yield of about 8.65%, much higher than what other S&P 500 Index ETFs like the VOO and SPY offers. It achieves that by using the covered call ETF approach. 

In this, the fund invests in 136 blue-chip companies that are part of the S&P 500 Index. It then writes call options on the S&P 500 Index, taking the premium and distributing it to its investors as a monthly dividend. 

One of the main challenges for the JEPI ETF is that it misses some of the S&P 500 Index gains if it is in a strong uptrend. That’s because the call option has a strike price that limits these gains.

The other main challenge that JEPI ETF buyers have is that it has some tax headwinds that affect the ultimate return. Since the ETF uses equity-linked notes for its options, these premiums are taxed as short-term capital gains and are passed as ordinary income. 

Is JEPI a good ETF to buy?

JEPI and other covered call ETFs have always promised a higher and consistent dividend return. However, as a long-term investor, it is always important to look at the total return. 

A total return metric evaluates the performance of an asset, considering both its price and the impact of dividends.

In this case, one can look at the total return since it was started and compare it with a similar investment in the S&P 500 Index and its passive ETFs like VOO and SPY.

Data compiled by SeekingAlpha shows that the VOO ETF stock has jumped by 12.18% this year, while JEPI’s price return was minus 1.10% in this period.

The underperformance has continued when considering the total return. JEPI’s total return is 4.88%, while the VOO ETF has returned 12.9%. 

The same performance has happened in the longer term. JEPI’s total return in the last three years was 30% compared to VOO’s 67%. 

JEPI vs VOO ETF | Source: SeekingAlpha

Most notably, this performance extends to other covered call ETFs. For example, JPMorgan’s Nasdaq Equity Premium Income ETF (JEPQ) has continued to underperform funds tracking the Nasdaq 100 index. Similarly, ETFs like TSLY and NVDY have always trailed behind Tesla and Nvidia in terms of total return.

A common argument for JEPI and similar funds is that they do better than the standard funds during the periods of high volatility when the premiums are wide. However, a closer look shows that the out performance in this period is usually minimal.

Therefore, based on the historical performance, one can assume that the JEPI ETF will continue to underperform the benchmark S&P 500 Index ETFs.

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