The JPMorgan Equity Premium Income ETF (JEPI) has started the year well as it surged to a record high. Its stock soared to a high of $55.85, meaning that it has surged by over 11% from its lowest point in November. In all, it is up by 1.32% in the past 12 months.
The raging bull is backThe financial market has been characterised by the strong performance of equities this year and the trend is expected to continue. The S&P 500 index has jumped by more 21% in the past 12 months and is sitting at its all-time high. Similarly, the Nasdaq 100 and Dow Jones indices have roared back also.
Analysts expect that the rally has more room to run, thanks to the rising optimism that the Fed will cut interest rates later this year. Most economists have ruled out a rate cut in March, thanks to the recent strong US inflation numbers and the impact of the ongoing crisis in the Red Sea.
The crisis has pushed the price of crude oil modestly high while shipping prices have gone parabolic in the past few weeks. Most importantly, the Fed has no reason to cut rates in March because the economy is in a good shape. The labour market is stable while consumer confidence has soared.
As I wrote recently, the US equities market is also bracing for trillions of dollars in inflows as money moves from cash assets to stocks. This, together with the strong financial results by the likes of Netflix and Johnson & Jonson explains why stocks have jumped sharply in the past few weeks.
It also explains why a sense of greed has moved to the market. The CNN Money fear and greed index has risen to the greed zone of 73 and it could move to the extreme greed area soon.
Is JEPI a good ETF in these conditions?
JEPI vs S&P 500 index
Therefore, in line with this sense of optimism, some investors have moved to JEPI and JEPQ, two of the most popular active funds in the market. Besides, in addition to the stock upside, the funds provide excellent monthly returns. JEPI has a dividend yield of about 8%, which is higher than what generic ones like SCHD and SPY offer.
However, if you are optimistic about US equities, I believe that investing in generic funds is better than JEPI because of how it is structured. For starters, JEPI is an active fund that achieves its returns in two ways.
First, the fund invests in the S&P 500 index companies and take advantage as it jumps. Second, it sells call options and takes the premium. As a result, if the S&P 500 index rises, the fund benefits from its uptrend and the covered call premium. The challenge with this situation is that the covered call has a limit that limits its upside.
The JEPI ETF outperforms the S&P 500 index when it is either moving downwards or falling. In these two situations, the fund will typically make a profit or mitigate the losses by banking on the options premium.Most importantly, as I wrote here, a while ago, historically, the generic ETFs like SPY and VOO have typically outperformed covered call ETFs.
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