3 Reasons I Prefer JEPI To JEPY

seekingalpha06-07

JEPY is a relatively new fund with a strategy quite similar to those of covered call ETFs.It offers investors a massive, unsustainable 55.4% distribution yield. Share prices will almost certainly ...

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Share prices will almost certainly ...</p>\n\n<a href=\"https://seekingalpha.com/article/4697995-three-reasons-i-prefer-jepi-to-jepy\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"JEPY","symbol_name":"Defiance S&P 500 Enhanced Options Income ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4697995-three-reasons-i-prefer-jepi-to-jepy","article_id":"2441064431","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1360078240/image_1360078240.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2441064431","pubTimestamp":1717761577,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"JEPY is a relatively new fund with a strategy quite similar to those of covered call ETFs.It offers investors a massive, unsustainable 55.4% distribution yield. 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Share prices will almost certainly decline long-term, as they have since inception.I believe JEPI to be a stronger, more balanced, sustainable choice.fermate The Defiance S&P 500 Enhanced Options Income ETF (NYSEARCA:JEPY) invests in treasuries and sells daily S&P 500 put options. Doing so is functionally equivalent to investing in the S&P 500 and selling covered calls, a more common, well-known strategy. Doing so results in significant option premiums and distributions for shareholders, with the fund yielding 57.1%. It also significantly limits potential capital gains, ensures long-term capital losses, lower share prices and distributions. In my opinion, there are stronger covered call ETFs out there. Chief among these is the JPMorgan Equity Premium Income ETF (JEPI). JEPI's strategy all but ensures stronger capital gains / share price stability than JEPY, and should result in outperformance during significant bear markets. At the same time, JEPI has existed for much longer, so we have a clearer idea of the fund's performance. Due to these issues, I would not be investing in JEPY, and would choose JEPI instead. JEPY - Overview and Analysis JEPY invests in treasuries and t-bills, and sells S&P 500 put options, almost always daily options, generally in-the-money. Holdings as of 6/6/2024 are as follows: JEPY The fund's treasuries and t-bills are, I think, pretty self-explanatory. By selling put options, the fund's counterparty is given the right, but not the obligation, to sell shares in the S&P 500 at a predetermined date, for a predetermined price (assume for simplicity's sake, that one can directly invest in an index). In JEPY's case, the date is almost always one (market) day after, and the strike price is (generally) closest to market price. JEPY's current option lasts until 6/24/2024, so close to three weeks. First time seeing the fund selling a non-daily option. It has a strike price of 5,360, effectively equivalent to the S&P 500's 5,359 price. By selling these options, the fund receives significant option premiums in cash, which is then distributed to shareholders. Right now, the fund sports a massive 57.1% distribution yield, from annualizing its latest monthly distribution. By selling put options with these characteristics, the fund is exposed to the entirety of the S&P 500's downside. By selling put options with these characteristics, the fund does not generally share in any S&P 500 upside. On the other hand, the fund might see some temporary gains from generating and retaining option premiums, at least until these are distributed to shareholders at the beginning of each month. As the fund does not generally see any upside, but experiences all downside, share prices should continuously trend downwards. This has been the case since inception, as expected. Data by YCharts So, the fund sports a massive distribution yield, but sees consistent, significant capital losses. On net, expect positive total returns, as has been the case since inception. Data by YCharts In general, the fund should underperform during significant bull markets, as the fund should not be able to generate sufficient premiums to overcome S&P 500 capital gains during these. As an example, the S&P 500 is up 21.6% since the fund's inception in late 2023, during which JEPY has underperformed. If the S&P 500 had rose by less, perhaps JEPY's distributions would have been enough to outperform the index. Data by YCharts In general, the fund should outperform during bear markets, due to its strong distributions (if there are no capital gains, then these are all that matter). JEPY is a young fund and has yet to experience a bear market, so I can't really gauge its performance during any such scenario. JEPY has outperformed during a few short periods of time during which equities were down, including during parts of October 2023 and April 2024, as can be seen above. These periods of time are too short to be all that meaningful, however. Long-term, the fund should underperform the S&P 500, as stocks mostly go up, and as these options are generally priced in such a way that this is the likeliest scenario. JEPY itself has underperformed since inception, although as the fund is quite young that information is not all that meaningful. JEPI has a longer track-record, and has underperformed since inception, as expected. Data by YCharts As an aside, the non-daily put option really ruined the flow and ease of understanding of this section. JEPY had sold a daily option when this got originally published to the CEF / ETF Income Laboratory, and the explanation there seemed simpler, and more aligned with the fund's strategy (because it mostly sells daily options, so analyzing this is best for understanding the fund). JEPY versus JEPI - Quick Comparison JEPY and JEPI are quite similar funds, even the tickers are similar, so a comparison seems warranted. As we shall see, JEPI seems like a much stronger, well-rounded investment than JEPY. Strategy and Holdings JEPY invests in treasuries and t-bills, and sells daily S&P 500 put options. JEPI invests in a portfolio of low-volatility U.S. equities and invests in ELNs which provide exposure to S&P 500 returns plus written call options on the same. Although the strategies seem very different, the end result is somewhat similar, with both funds sporting above-average distribution yields, seeing reduced equity upside, significant equity downside. JEPY's strategy is much more aggressive, as we shall soon see. Capital Gains and Losses JEPI's ELNs track options which last a few months, which means the fund can generally recover from short-term equity market losses. As an example, equities were down this past April, but recovered in May. JEPI's share price has mostly recovered too, lagging behind the S&P 500 a bit. Data by YCharts JEPY's put options generally expire daily, so the fund can only meaningfully recover from intraday equity losses. As an example, the fund's share price has not meaningfully recovered from April losses and is down 9.3%. Data by YCharts JEPI's ELNs are structured in such a way that the fund sees some equity upside, unlike JEPY, which sees somewhere between zero and very little. JEPI's low volatility portfolio should see below-average losses during downturns and recessions too, as was the case in 2022. Data by YCharts Due to all of the above, JEPI could see some long-term capital gains, unlike JEPY, which will almost certainly see significant, consistent long-term capital losses. JEPI's share price is up a respectable 13.3% since inception in mid-2020. Data by YCharts JEPY's share price is down 20.1% since inception in late 2023. Since that date, JEPI's share price is up 3.5%. Data by YCharts JEPI's more sustainable share price is a significant benefit for the fund and its shareholders, and an important advantage relative to JEPY. This is of particular importance to more conservative, long-term investors and retirees. Distributions Analysis JEPY sports a massive 57.1% distribution yield, from annualizing its latest monthly distribution. JEPI sports a 7.4% TTM dividend yield, much lower than that of JEPY, but still quite strong on an absolute basis. For both funds, distributions are dependent on many factors, including asset values (more assets means more options are sold), and option prices / premiums. JEPI's distributions seem long-term sustainable, considering the fund's rising share price. Distributions have slightly declined since inception, worse results than expected, but not significantly so. Seeking Alpha JEPY's distributions seem long-term unsustainable, as the fund's share price has steadily decreased since inception. Distributions have declined by 16% since inception, with a lot of volatility. Seeking Alpha In most cases, a higher distribution yield is an important benefit and advantage. In this particular case, JEPY's distributions are so long-term unsustainable that I can't really see them as a benefit, at least not the headline figure. Due to JEPY's structure, investors will almost certainly not receive +50% in distributions moving forward, so I'm not sure that the figure being high is all that beneficial. Importance of Option Prices and Equity Volatility JEPY's options strategy is much more aggressive, and so returns are much more dependent on option prices and equity volatility. The clearest evidence of this is the fund's much higher distribution yield. The reason for the aggressiveness is selling daily options instead of monthly (or quarterly), selling so close to the money, and having a higher notional exposure (relative to the size of the fund). Due to the above, JEPY is much more exposed to the vagaries of option prices than JEPI. I see this is a significant negative, insofar as these issues are somewhat opaque, hard to analyze, and not top-of-mind for most investors. Total Return Track-Record JEPY has outperformed JEPI since inception. Outperformance is inconsistent, and concentrated in a couple of days after inception, and some days in May. Data by YCharts JEPI does have one important advantage in this regard: its performance track-record is much longer. This gives us a clearer idea of the fund's performance, benefits and advantages. As an example, JEPI significantly outperformed during 2022, the last period of significant, sustained equity market losses. Data by YCharts The above was a significant benefit for the fund and its shareholders, especially so for more risk-averse investors and retirees. At the same time, we know that JEPI has somewhat underperformed the S&P 500 long-term, but that underperformance has not been significant or consistent. JEPY is a much younger fund, so we have no visibility on the fund's long-term performance. Data by YCharts In my opinion, JEPI's longer performance track-record is a significant advantage relative to JEPY, and reason enough to pick JEPI over JEPY. Conclusion  JEPY invests in treasuries and t-bills, while selling S&P 500 put options. Doing so results in a similar return profile to that of covered call ETFs, including JEPI. I strongly prefer JEPI as an investment, due to its more stable share price and longer performance track-record. As such, I would not be investing in JEPY.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441064431"}