But the options-based income provided by the JPMorgan Equity Premium Income Fund can vary depending on market volatility. “We look to sell an option with a 30% chance of finishing in the money,” Reiner says. “That means when market volatility goes up, we’ll sell an option that’s farther out of the money, giving our investors an above-average level of income with more potential upside than we’d get from selling an option in normal volatility experiences.
“It also goes the other way because when market volatility is low we’ll give you a little less upside and less income than the long-term average,” he continues.
The fund recently reported a high turnover rate of 217%, which Reiner says results from how he manages the one-month options he uses for this strategy. “Most people set it and forget it with a one-month option,” he explains. “Our turnover is based on our strategy to ladder and stagger our options every week on a fraction of our portfolio, so over time there’s potentially more upside to be had at any given point.”
Reiner notes that he employs ELNs in his hedged equity strategy because they’re a packaged security letting the fund distribute income in a way that won’t create return of capital.
“Option income is not considered income as per the rules and regulations,” he says. “Rather, it’s considered potential capital gains. As such, many strategies that do call overlays have return of capital when they distribute their options premium. Using an equity-linked note converts the options premium to being a coupon. That coupon is bona fide income.
“Every month we distribute 100% of our dividend and 100% of our options income as a coupon, net of fees,” he adds.
It’s important to note that exchange-linked notes are exposed to the credit risk of the financial institutions that issue them. Reiner says that’s something his firm monitors when sourcing these notes. “From a credit quality perspective, there are lots of different aspects within J.P. Morgan that monitor counterparty risks,” he says. “We’re transacting with some of the largest and best-rated financial institutions in the world.”
Ice Cream Man
On the equity side, Reiner says his fund puts an emphasis on playing defense. “We attempt to fill our equity portfolio with steady Eddie earners with less price volatility and less earnings variability over time,” he notes. “We have Google as a top-five holding, and it doesn’t pay a dividend. How many income-oriented strategies would own a non-dividend paying stock? We’re looking for stocks we find most attractive, whether or not they pay a dividend.”
J.P. Morgan Asset Management is one of a growing number of traditional asset managers offering actively managed exchange-traded funds that mimic some of their existing mutual fund strategies. In many cases, they’re structured as semi-transparent ETFs that don’t have the same daily portfolio disclosure requirements of traditional ETFs. Instead, in most cases they have quarterly portfolio disclosures akin to traditional mutual funds.
The hedged equity strategy behind the JPMorgan Equity Premium Income Fund is also the foundation for the JPMorgan Equity Premium Income ETF (JEPI), which launched in May 2020 and had $5.8 billion in assets at year-end 2021, or $3.7 million more than the older mutual fund. Both products disclose their portfolios daily.
“I manage both portfolios, so if I make a trade in one I make it in both. I manage them to be near identical,” Reiner says. “I make the ice cream, so whether you like it in a cup or a cone doesn’t matter because I want you to partner with me and my ice cream. There are some advisors who run their portfolios using mutual funds, and others who use ETFs or a mix. It’s all a matter of their personal preference. We launched the ETF so people can have that flexibility.
“From my perspective I run a single strategy,” he continues. “I think this is the wave of the future where investors say ‘I like this strategy,’ and the next thing they ask is, ‘How do I present this inside my clients’ portfolios?’”