The JPMorgan Equity Premium Income (JEPI) ETF stock has done well this year as US shares have soared. It has soared to a record high of $57.50, up by ~21% from its lowest point this year. So, is the JEPI ETF a good buy or is the popular Vanguard S&P 500 ETF (VOO) better?
How the JEPI ETF works
JEPI is the biggest ‘boomer candy’ ETF with over $40 billion in assets under management (AUM). It is a blue-chip fund that aims to generate growth and income.
It is an actively managed fund that uses two approaches. The management team invests in a basket of blue-chip companies, including popular names like Nvidia, Microsoft, and Google. It has 135 companies in its portfolio.
JEPI then uses the covered call approach to generate return. In this, the manager writes call options, which give it a right but not the obligation to buy the S&P 500 Index at a strike price before the expiry period. This options trade gives it a premium, which the fund distributes to investors every month.
The dual approach ensures that the JEPI ETF stock rises when US equities are rising. It also makes it an income play, which explains why it has a dividend yield of 7.5%.
However, the strategy has a major limitation, especially in a stock market bull run. In this period, the strike price is often passed, which limits the potential upside.
What is the VOO ETF?
The Vanguard S&P 500 ETF is a more straightforward fund in that it invests in the S&P 500 Index and is the biggest passive income ETF in the world.
As a passive fund, VOO is much cheaper than JEPI in that it has an expense ratio of just 0.03%. This means that a $10,000 investment costs just $3 a year. JEPI has a ratio of 0.35%, meaning that a similar investment will cost $35.
As a growth-focused fund, VOO has a low dividend yield of just 1.12%. In contrast, JEPI has a dividend yield of 7.50%, making it ideal for dividend investors.
VOO vs JEPI ETF: one is a better buy
VOO and JEPI ETFs have different goals. JEPI aims to provide a regular monthly income, which normally rises in periods of volatility. VOO, on the other hand, provides investors with a cheap approach to investing in the stock market.
A closer look at the two funds shows that VOO is a better buy despite its lower yield. For example, JEPI’s total return in the last three years was 31%, while VOO has returned 78% in this period.
The same has happened in the last 12 months as the VOO gained by 14.70%. JEPI rose by 3.86% in the same period. This year, JEPI is up by 7.75% against VOO’s 17.80%.
Historically, data shows that covered call ETFs underperform benchmark indices. For example, Nvidia stock has always done better than the 87% yielding NVDY. Similarly, the MSTR stock has lagged behind the 280% yielding MSTY ETF.
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