The JPMorgan Equity Premium Income ETF (JEPI), a new recommendation for our portfolio, invests in defensive stocks and uses options strategies to generate income, suggests Carl Delfeld, editor of Cabot Explorer.

JEPI has been the most popular active ETF by a wide margin in 2023, bringing in $7.1 billion of new cash, according to FactSet. This ETF delivered a 12-month rolling dividend yield of 11.7% over the past year.

It was launched in 2020 and has risen in popularity, roughly quadrupling its assets under management from $5.8 billion at the start of 2022 to $24.6 billion today.

This ETF’s double-digit yield comes from both option premiums and dividends. The fund invests in equity-linked notes (ELNs), a type of debt that provides returns linked to underlying instruments within the ELNs.

In JEPI’s case, these ELNs mimic the returns of an S&P 500 covered call strategy. The ELNs that JEPI owns convert the options premiums received into coupons that are distributed monthly. JEPI invests up to 20% of its net assets in these ELNs, though their weighting in the fund is usually around 15%.

The great majority of the ETF is invested in stocks using what may be called a low-volatility value strategy.
Undervalued stocks are selected from the S&P 500 universe and then put together in a way that creates a portfolio that has lower volatility than the index.

The result of this one-two approach is a low-volatility, large-cap portfolio, but one that is much more actively managed.
In addition, it offers great diversification with every stock in the fund capped at 2%, while sectors are capped at 17.5%.

Even better, it accomplishes this feat with only a 0.35% expense ratio, below the average 0.7% ratio an active fund charges in the US, according to data. Adding this ETF to your portfolio is a good way to generate welcome income and provide diversification to reduce volatility.

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