Since I started my channel in 2020, there's been one ETF that people have requested I review more than any other. In this video, we're going to talk about it.
This video is for educational purposes only. It should not be considered investment legal or tax advice. It is not an offer to buy or sell any security. Past performance does not indicate future results. Investing is risky. That ETF is JP Morgan's equity premium income aka JEPI.
And here are 18 things that you should know before you invest. We're going to start with the least important and move down to the most important. Before we get to number 18, I wanted to introduce this week's video sponsor, which is you. Thank you to everyone who's currently
supporting me on Patreon and YouTube Premium. I also wanted to shout out to anyone who has purchased my course. For those of you that have purchased the course, I have released the dividend discount module. It's about an hour covering the dividend discount model including
how to build your own in Excel. And we'll cover a couple different stocks as an example, 3M and Visa. So if you haven't seen those videos, be sure to check them out. If you're interested in becoming a part of the course, it's currently in beta mode. So I'm offering anyone who signs
up before the course is officially released to get a discount on all future videos.
在課程正式發布前報名，即可享受所有未來影片的折扣。
01:24
So I'm planning to add more content over time. So check it out, ask questions if you have any, and I'll make basically anything you want to know about valuation. I want to include it in this course. So now back to the video. So here are 18 things you should know before investing in
JEPI. Number 18 is it's been a pretty successful ETF launch. Now I know you don't care about ETF launches or how successful they are. You just want to know, is this ETF going to make me a positive return, a good return, or not? But I think it's important to always remember that ETFs
or any financial products ultimately are trying to make a profit, not for you, but for the sponsor of the ETF. So that should always be in the back of your mind. When you hear about a new ETF that was launched, it sounds fantastic. Remember, the job and the goal of the firm sponsoring it,
in this case, JP Morgan, is to get as many assets as possible and to charge as high of a fee as possible to make them as much money as possible. Nothing wrong with that, but just be aware.
And by all accounts, the JEPI launch has definitely been successful. It just came out May 20th of 2020. And since then it's generated total assets under management of 14.4 billion. So rapid increase
and we'll see why here in a minute. And speaking of fees, JEPI is not cheap, but I do think it is a good value considering what it does for you. So the expense ratio for this ETF is 0.35%.
Obviously that's not as low as some of the S&P 500 ETFs out there. But considering that this fund is giving you some covered call riding exposure, and it's actually an actively managed fund underneath the hood. So I think for 35 basis points, that's a fantastic deal for this ETF.
Speaking of actively managed number 16, this is kind of secretly a low volatility stock portfolio.
說到主動管理，第16點，這其實是一個秘密的低波動性股票投資組合。
03:32
And not just that, it's a low volatility, I would say active stock portfolio. So if you look here at the prospectus from JEPI, it kind of gives three approaches. There's one, two, and three. I've blurred out the other two to focus on this one, which is that it constructs a diversified low volatility
equity portfolio through a proprietary research process, aka active management, designed to identify over and undervalued stocks. Very interesting, with attractive risk return
characteristics. And I think this risk is a big theme for JEPI. You can see that the top 10 holdings, almost all of these tend to be very high quality, what you might call blue chip stocks. Basically, all of these are essential goods and services type companies. And what's interesting is that
you do see that the beta for this fund over the last year has been 0.65. So indeed, this is a low volatility ETF. You might find a lot of similarities. Number 15, the JEPI fund currently has 122 different
holdings compared with 500 or so in the S&P 500. You can see that here. So this is certainly a diversified ETF, but you're definitely getting a little bit more concentration risk than you would be with the S&P 500. However, I definitely don't think that's necessarily a bad thing. There is
such a thing as dewercification. And I think JEPI seems to be doing a good job choosing more lower volatility stocks, which aligns with the objective of the fund. Number 14, this fund has very little tech exposure. If you take a look here is the sector allocation of the fund.
And just for reference, the S&P 500 has about 27% in tech. And if you look here at the sector breakdown, most notably, there's only 11.1% in IT. The biggest three sector exposures are in the low volatility consumer staples, pretty anti cyclical healthcare, and then 12.8% in industrials.
Despite having little technology, it's interesting to note that this JEPI fund actually has a higher PE than the S&P 500. So if you take a look at the portfolio analysis from the prospectus, you see that the price earnings ratio on average for these stocks is 18 and a half versus the S&P
at just 16 and a half. Certainly a large part of this premium would be because of quality. But it is important to note that this does tend to be a quote unquote more expensive fund. Number 12, this fund will go down with stocks in bad markets. This is a piece from the risk profile and the
僅為16.5倍。當然，
06:30
prospectus clearly stating that the value of this fund is going to rise or fall because of changes in the broader market. So just because this is kind of an alternative covered call ETF type fund, certainly does not mean that you're going to be immune from any downside from the stocks.
It still holds those 122 stock positions. So if the value of those positions were to decrease, so is the value of this fund number 11. And the reason you're probably interested in JEPI is
yield. The 30 day SEC yield, which is basically the last payment annualized for a year, less the expenses is a whopping 14.08%. Last month, that was 12 and a half percent,
which is still staggeringly high. And if you look at the 12 month rolling dividend yield, meaning the last 12 months dividends, and I'm going to put those in quotes, you'll see why in a second, was just under 10%. But the reason why I put dividends in quotes is that not all of this
income comes from dividends that are paid out by companies. Back to the prospectus, you can see in the approach section, it says that this ETF generates income through a combination of selling options. And this is where most of the income comes from and investing in US large
cap stocks. It seeks to deliver a monthly income stream from associated option premiums and stock dividends. And if I were just to guess the dividend yield of the stocks in the portfolio, I would probably guess around 2%, which means you're getting at least 8 to 10% of the income
is coming exclusively from these option premiums. Now, some people might say that's just a technicality, but it really isn't. It's a big deal. These are not, this is not a dividend yield per se.
This is an option premium for the most part yield, which means that number nine, that big income comes with a cost. And that cost is from limited upside. So here, this is again from the prospectus of the ETF. When the fund sells call options within an ELN, which we'll talk about in a second,
it receives cash. So those cash dividends, but it limits its opportunity to profit from an increase in the market value of the underlying instrument. So if you have a stock at $100, the call option says that this other party is going to pay you a $10 premium. But in exchange
for this $10 premium, they get to buy the stock from you at $100, no matter what it goes to.
這10美元的溢價，他們有權以100美元的價格從您手中購買股票，無論其漲到多少。
09:20
So if the value of the stock goes up to $150, this person's going to make $150 minus the $10, so a $40 pure profit. Meanwhile, let's say the value of this stock were to drop to $50. Again,
this person that pays you the $10 actually made off better than they would have for buying the stock outright. So in this case, you got $10, but your market value dropped by $50. So you were out $40.
The only way receiving this $10 covered call premium really pays off for you as the seller of the covered call is if the stock price stays in kind of a range-bound level. And speaking of covered calls, this isn't technically a covered call ETF, which I don't think a lot of people
know about. This fund actually does what are called ELNs. So it can invest up to 20% of its assets and ELNs, which are structured as notes that are issued by counter parties. And those notes are supposed to offer a return that's linked to the underlying instrument that those ELNs seek
to track. So those instruments are designed to combine the characteristics of the S&P 500 and a written call option. So in most cases, this makes no difference to you. However, it does introduce fact number seven, which is there is some counterparty risk in
JEPI. So again, from the prospectus, it's saying when this fund invests in the ELN, it does make it subject to certain debt security risks, such as credit or counterparty risk.
So if the fund were to give money by the ELNs from a counterparty and those counter parties basically go bankrupt or fail to make payments, then that could impact the value of JEPI.
So that is a, I would say small risk here, but certainly something to keep in mind.
所以，我會說這是一個小風險，但絕對值得留意。
11:19
And number six, JEPI will perform best in sideways slash down markets. You can see that very clearly here in the limited time the fund has been in existence. You can see that in a big bull market, like 2021, this fund increased in value by 21 and a half percent, which compares unfavorably to the
Morningstar US market index, which was up nearly 26%. However, when you get in a bad market like we've had so far this year, that is generally when JEPI will outperform. Now it doesn't necessarily mean it won't go down. As you can see, the fund is down two and a half percent for the year.
However, compared with the Morningstar market index, that is quite good. Most US stocks are down 16%, which I think brings us to a key point for JEPI. Number five, it seeks to offer and generally has offered better risk adjusted returns. Back to the prospectus and the approach, the
third point is that JEPI seeks to deliver a significant portion of the returns associated with the S&P 500 index with less volatility in addition to monthly income. We can verify that in Portfolio Visualizer, just comparing JEPI to a couple of different ETFs. So I added here VIG,
QILD, and then the S&P 500. You can see JEPI was down at the max negative 12.99. VIG, which is the 10 year dividend growth ETF. That was down 15.2%. And then you've got the competitor
QILD, which is another covered call ETF that tracks the NASDAQ. That was down 22.7 and the S&P 500 topped a bottom was down nearly 24%. So JEPI was the best performing top to bottom.
It still went down like we talked about, but it went down less than the alternatives.
如我們所討論的，它仍然下跌了，但下跌幅度比其他替代品要小。
13:21
You can also see that the Sharpe ratio and the Sortino ratio, both of those favor JEPI, meaning, and these are basically, both of these are just trying to say, what's the best return per unit of risk? And in both cases, you see that the standouts are JEPI and VIG. Number four,
however, is there is no free lunch. So you're getting a better risk adjusted return. But that means you should not, and it doesn't mean you won't, but you should not beat the S&P 500 over the long run. So going back to the prospectus, it says that it seeks to deliver a significant
portion of the returns of the S&P 500 index. It also says later on in the prospectus in the risk section, that because this fund seeks lower relative volatility, the fund may underperform the S&P 500 index, particularly when the market is rising. This is just further illustrated here
when you look at the index, which again is the Morningstar's total market index. When the value of stocks are increasing, you see the red line, which is the Morningstar index does substantially better than JEPI, which is the blue line. However, when the market falls, you see that JEPI falls
quite a bit less. So that's the trade off. But if the market long term is going to go up, that means that JEPI probably long term will not go up as much. And also just to be clear, both of these charts do include reinvested dividends. The third, and I think a very important point,
is that you should not, or probably should not buy JEPI in a taxable account. Within the prospectus, they give a breakdown of what a taxable investor might be able to expect, if they had invested in the fund. So for the period ending, December 31st, 2021,
the fund returns, so JEPI returned 21.61%. However, if you would account for the taxes on the distributions, so the dividends, quote unquote, that were paid, the return would then drop to 18.43%. If you would also sell the shares of sell JEPI and take the gain on the increase in the value
of the fund, now the net returns would drop to 12.8%. And number two, don't spend the income, and at least not all of it. A major and dangerous misconception spread by several YouTubers online
is that you can safely spend the income generated by a covered call ETF and not run out of money, right? You don't have to save as much, and you can retire on the 12% dividend produced by this ETF or other ETFs. But the reality is that simply not true. Take a look here at the actual returns
of the QILD ETF. And the reason I use this is because it went back to 2014, whereas JEPI only goes back to 2020. But I think this illustrates the point quite nicely. And so what I've done is said, what if an investor with $1 million at the start, so in 2014, and they would start to take
out $10,000 per month, which equates to about 12% of the portfolio each year, and they would increase those distributions each year with inflation. Here's what happens to the value of their funds since 2014. You can see it's not quite been 10 years, yet the value of the covered
call ETF QILD is down 76.5%. So you now only have $243,000 left. And that is the worst of any of these ETFs. So spending 12% is not a sustainable withdrawal rate, no matter whether the, you know,
income quote unquote is 12% or not, it's just a very bad and dangerous idea. So just because JEPI is paying you a large amount of income does not give you license to spend all of the income being produced. That is a surefire way to end up with a portfolio value that looks like you saw
in the last chart. And number one, JEPI is the best covered call ETF that I have seen.
首先，JEPI是我見過最好的備兌認購期權ETF。
17:41
What I like about it is that it is truly focused on doing what it is trying to do, which is provide a better risk adjusted returns for investors. And I think it accomplishes that by both investing in lower volatility stocks and by selling the upside via that covered call premium.
So I think this ETF is potentially a pretty good pick if you're someone that maybe you think the market is going to go sideways or down in the future. But you still want to somewhat participate in investing in stocks. This could be a great diversifier for the portfolio, particularly when
the volatility is high. That means the fund is able to sell the covered call premiums for an even greater amount. My issues with other ETFs, specifically the NASDAQ QILD covered call ETF, is that you're selling the upside of growth stocks. And the whole reason you're investing in
those growth stocks is because of that upside. So why would you sell it? Plus you're retaining the downside of those more aggressive, risky stocks, which puts investors in a bad position like you've seen in 2022. QILD has performed terribly. And the reason is that the underlying
index, the NASDAQ has performed terribly. So JEPI aligns both of the objectives of having lower volatility stock exposure with the covered calls. And I think that presents a very interesting and attractive package for investors. So if you're someone that's looking for a covered
call ETF to add to your portfolio, I think JEPI is probably one of the best choices that I've ever seen. I hope this video was helpful for you. If you have any questions about JEPI or anything else, let me know in the comment section down below. Thanks for watching and I will see you in the next
