How an ETF with an 11% yield shows a growing use case for active strategies

Published Wed, Mar 8 20232:22 PM ESTUpdated Wed, Mar 8 20232:29 PM EST

Rising yields and investors' hunt for income have created an opening for actively managed exchange-traded funds to grab a foothold, including one with an eye-popping monthly payout. The JPMorgan Premium Equity ETF (JEPI) has a 12-month rolling dividend yield over 11%, and its 30-day SEC yield was just under that mark as of the end of February. That has helped make it one of the most popular ETFs of the year, with over $4 billion in inflows so far, according to FactSet. The fund's success is due in part to a derivatives strategy, as JEPI sells call options on the broader market that generate income in exchange for less upside. When markets go sideways or decline, and interest rates rise, the strategy can outperform market averages for both stocks and some forms of bonds, as JEPI did in 2022. "The market environment has been such that investors are looking for income without duration. … JEPI having basically zero duration but still being able to give off that income has been a really interesting kind of bond replacement," said Bryon Lake, global head of ETF solutions JPMorgan Asset Management. But the equity portfolio side of the fund is also different from some of the biggest ETFs on the market, because it is actively managed. The growth of JEPI shows one way that active funds can stand out from their passive counterparts, despite active stock pickers' poor historical performance versus the market. ETFs have traditionally and predominantly been a passive investing vehicle. The biggest funds in the market track indexes, like the S & P 500, and give investors market returns minus fees. But 2022 was a surprisingly good year for active managers , and active ETFs gained some share against their passive counterparts. Funds like JEPI, with clear differences and goals from traditional passive funds, can be appealing to investors. "Outcome is helpful, and the fact that JEPI has monthly distributions and people can pull it up on their database of preference and see what those distributions have been is a really powerful thing," Lake said. He added that the fund was now three years old, giving it a longer track record for investors and financial advisors to trust. Of course, active strategies benefit fund managers too, in the form of higher fees. JEPI's expense ratio of 0.35% is well above that of many S & P 500 index funds, and some other active ETFs charge more than double what JEPI does. And strategies like JEPI's that offer extra income or downside protection can underperform during bull markets, when stocks are rallying. Other uses for active Outside of derivatives-based products, two other areas where active strategies can make sense are fixed income and international investing, Lake said. The JPMorgan Ultra-Short Income ETF (JPST) has also been popular this year, with $1 billion of inflows and a 30-day SEC yield above 4%. Among the firm's smaller active fixed income funds, the Core Plus Bond ETF (JCPB) has a roughly similar yield, while the Income ETF (JPIE) yields above 6%. "Where I think the penny has dropped on active in the ETF wrapper, I don't think it has fully manifested on the fixed income side," Lake said. On the equity side, the firm's International Research Enhanced Equity ETF (JIRE) has also been popular this year, with $280 million of inflows and a total return of 7%. The firm is also stepping into the world of "semi-transparent" ETFs, which publish a proxy portfolio of their holdings instead of a daily list and serve as a bet on a manager's stock picking strategy. JPMorgan launched its first fund in that category on Wednesday.