The Reason Why I Rate JEPI A Sell Even Though It Has Done Its Job

JEPI is likely to outperform the overall market in the next few months, but here’s what you really need to consider.

Readers who follow me on Seeking Alpha may have noticed an interesting trend from me where I have become increasingly aggressive with my ratings.

Of the last six ETFs I covered, I rated four a Sell or Strong Sell.

These four funds weren’t necessarily garbage funds unsuitable to invest in. Some have done a very good job in the last few months and are anticipated to do an even better job in the coming months.

One example is the JPMorgan Equity Premium Income ETF (JEPI).

Since its inception, JEPI has accomplished its goals of delivering monthly income and equity exposure with less volatility extremely well.

This was very evident during the 2022 bear market when JEPI offered better total returns and drawdowns than the S&P 500 for two whole years.

Chart From Seeking Alpha | JEPI Vs. S&P 500 Total Returns January 1, 2022 — December 31, 2023

With volatility levels climbing above 20 and multiple signs pointing to a potential recession in economies worldwide, JEPI is well-positioned for outperformance.

Why then, have I rated JEPI as a Sell, not once but twice?

An ETF’s Goals Versus Your Personal Goals

Although JEPI has accomplished its described objective, you need to consider whether that objective aligns with your personal investing goals.

There are three things all income investors need to consider with JEPI.

Lower volatility does not protect you against market crashes.

Share price versus income volatility.
Taxes.

Lower Volatility Does Not Equal Crash Protection

When I gave JEPI my first Sell rating in my article, “JEPI: Losing Its Appeal With This Major Flaw,” a main discussion point was how JEPI’s lower volatility did not equal crash protection.

The mutual fund version of JEPI, JEPIX, had offered insights into how JEPI would have performed during the 2020 pandemic crash. Unfortunately, JEPIX was hit almost just as hard as the S&P 500.

Chart From Seeking Alpha

It is understandable, though, and reasonable to assume that market crashes that hit all sectors will bring JEPI down as well.

This is because the fund gets lower volatility in its portfolio by choosing stocks with historically lower volatilities compared to the S&P 500 and adding weighting caps to individual tickers and sectors.

There isn’t anything in JEPI that performs neutrally or inversely against the overall market itself.

Share Price Vs. Income Volatility

If you’re an income investor, would you rather let your portfolio or income fluctuate 10% from month to month?

For most, a stable income is more attractive.

Budgeting and managing your expenses is far easier when you know how much money is coming in.

On the other hand, you’re not particularly concerned about having a super stable portfolio value because that will only matter if you sell.

With JEPI, monthly payments fluctuate significantly.

In my article “SPYI Vs. JEPI: One Of These ETFs Is Highly Overrated,” the standard deviation of JEPI’s distributions since its inception has been about 9.29%, with changes in its distribution rate as much as 58.58% or 141.45% depending on if you want to look at it as a drawdown or gain.

Chart From Seeking Alpha | JEPI Dividend History

JEPI’s Distributions Are Too…Ordinary

On top of JEPI’s variable distributions, investors who invest in JEPI in a taxable account could also receive a hefty tax bill at the end of the year.

JEPI’s distributions are primarily ordinary income, with a small portion (~17% last reported) coming in as qualified dividends.

What this means is that over 80% of your dividends are taxed at your ordinary income tax rates and is a dangerous combination with variable distributions.

Volatility levels could suddenly increase, increase the distribution amount that JEPI provides, and make a big enough change to send you to a new tax bracket.

This could mean consequences beyond paying a higher tax rate, like not qualifying for certain benefits by a small margin because your JEPI income increased.

And it would be very cruel to see your income suddenly drop right after too.

Every Investment’s Opportunity Cost

With these factors in mind, investors should also consider the concept of opportunity costs.

This is a concept that can be summed up as “what you could have instead,” and it’s become increasingly impactful on how I rate various investments.

For every dollar you put into JEPI, that’s a dollar that could be going to other investments.

What other investments?

Well, the Neos S&P 500(R) High Income ETF (SPYI) is one example. This fund offers larger, more tax-efficient, and more stable distributions than JEPI.

SPYI does not manage share price volatility as well as JEPI, but it does capture better upside over the long run.

And SPYI is just one example.

If you’re only going to invest in two funds and your two choices are SPYI and JEPI, then yes, there’s no problem buying both.

But when you expand your outlook to multiple funds and asset classes, your opportunity cost for each investment becomes much more nuanced.

Is SPYI and JEPI really a good combination? Or would I rather have SPYI and short-term T-Bills?

Am I really more worried about my day-to-day portfolio fluctuations than how much I get paid every month?

You don’t need to be perfect and make the best investment decisions ever.

But you should seriously consider your investment objectives and whether the investment you’re looking at will really help you accomplish your goals.

It’s kind of like buying a computer.

You could go into the store and buy the most expensive computer with the strongest NVIDIA GPUs on the market. Yes, you can browse the Internet and write on Medium with the computer, but did you really need to spend $10K on a top-of-the-line PC to write on Medium?

If you walked in without any research, you could have also ended up buying a Windows computer and then realized later that the workflows you use are designed for Apple operating systems.

All these issues are solved with some research, and the same can be said about investing in ETFs. Figure out whether the features of an ETF are for you and something you’re willing to pay for.

You can figure many of these things out as a member of Seeking Alpha. What I love about the platform is you often get a huge variety of perspectives, and it helps you see an investment in a light most suitable to your investing situation.

For example, I have rated JEPI as a Sell, but two authors before me have rated JEPI as a Buy or Strong Buy. You can see the differences in our opinions in the articles below:

SPYI Vs. JEPI: One Of These ETFs Is Highly Overrated — Kevin Shan

JEPI And The Market Correction — Quad 7 Capital

JEPI Doing Exactly What I Expected, Will Likely Beat GPIX — John Bowman

Financial Disclaimer: The views in this article are the author’s personal views. This commentary is provided for general informational purposes only. It does not constitute financial, investment, tax, legal, or accounting advice or an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with their advisor. The information provided in this article has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Their values change frequently, and past performance may not be repeated.

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