The covered call strategy - owning equities and selling call options to generate more income while potentially sacrificing some upside - is a well-established one, with at least 349 US listed ETFs tagged as “covered calls” and others doing similar strategies with different names such as “premium income”. JP Morgan’s US listed JEPI is the largest active ETF globally running over USD 35 billion while JEPQ runs over $17 billion - and both are now available in Europe.
In covered call strategies, the equity exposure can be either a passive index or actively managed, and the covered call writing overlay can also be either systematic or discretionary. For some products, the equity exposure is a passive index while the covered calls are actively managed.
For JPM Global Equity Premium Income Active UCITS ETF (JEPG), both elements are actively managed. It is benchmarked against the MSCI World index but its top ten holdings look very different from the index: T-Mobile US, Deutsche Telekom, UnitedHealth, Motorola Solutions, and Roper Technologies are the top five. The next five do contain two US mega caps, Microsoft and Berkshire Hathaway, alongside AbbVie, Pepsico and Southern. But Microsoft is the only top ten holding overlapping with the top ten in an MSCI World tracker such as iShares MSCI World (URTH). Clearly this is a genuinely active product and not a “closet tracker”.
JEPG’s monthly dividend fluctuates because dividends received and call option income vary from month to month. For instance, it has ranged between 0.41% in September 2024, annualising at 5.07%, to 0.75% in July 2024, annualising at 9.39%. Some of the share classes distribute monthly income while others accumulate it within the ETF.
JP Morgan also applies the active premium income strategy to US equity and US technology: JPMorgan ETFs (Ireland) ICAV - US Equity Premium Income Active UCITS ETF (JEPI), benchmarked against the S&P 500, and JPMorgan ETFs (Ireland) ICAV - Nasdaq Equity Premium Income Active UCITS ETF (JEQA), benchmarked against the Nasdaq 100, just launched while JEPG went live in December 2023.
JP Morgan brands all of these strategies as “premium income”, although they look similar to other ETFs marketed as “covered calls”. One explanation is that the calls sold on indices do not fully correspond to the underlying portfolio and are therefore not fully “covered”.
The expense ratio of 0.35% is the same for the US and European listed products, which is refreshingly consistent in a market where expense ratios in Europe are typically much higher. Some other providers do charge more for their European sister product than its US sibling.
The 0.35% is less than half the average 0.78% expense ratio for covered call ETFs and is generally good value for an active product. Passive strategies can have slightly lower fees: UBS US Equity Covered Call ETF charges 0.29%.