JPMorgan Equity Premium Income ETF (JEPI) — a variable dividend investment — is one of three covered call ETFs I have added to our model portfolio over the last two years, explains Tim Plaehn in a recent review of the holdings in his advisory service, The Dividend Hunter.

JEPI differs significantly from most covered call ETFs. First, it does not use a widely followed index or ETF as its underlying portfolio. Instead, the fund portfolio uses a proprietary stock selection algorithm.

JEPI’s literature says that it constructs a diversified, low volatility equity portfolio through a proprietary research process designed to identify over and undervalued stocks with attractive risk/return characteristics. It seeks to deliver a significant portion of the returns associated with the S&P 500 Index with less volatility, in addition to monthly income.

The portfolio holds about 100 stocks with relatively equal weightings. For example, its top 45 stocks carry position weights between 1.2% and 1.69%. Here are the top 10 stock symbols: BMY, PGR, ABBV, UNH, HSY, KO, LIN, MA, LLY, and TMO.

This is quite a diverse group of stocks, and the rest of the holdings have a similar spread across market sectors. The stock holdings account for 85% of the total JEPI portfolio.

The remaining 15% accounts for the fund’s unique strategy to provide covered call returns. The 15% (there’s a maximum of 20% allowed) consist of Equity Linked Notes (ELNs).

These ELNs are “derivative instruments that are specially designed to combine the economic characteristics of the S&P 500 Index and written call options in a single note form.” The ELNs provide cash flow from written call options to pay JEPI dividends.

Historically, the JEPI variable yield stays around 8%. However, with the recent drop in the market and higher volatility, the shares yield 11%. The fund has posted a year-to-date return of -11.8%. That looks a lot better than the 20% loss posted by the SPDR S&P 500 ETF (SPY) over the same period.

I recommend JEPI along with our other covered call ETFs so you can put the dividends on automatic reinvestment and let the compounding work for at least a few years.

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