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The wall of money means the defensive fund has become the largest active ETF Only two ETFs have had larger inflows this year, both of which are passively managed.<\/p>\n
A bull market is traditionally accompanied by a wave of euphoria, with ever more investors getting sucked in as stocks march higher. The current Wall Street variety \u2014 with the S&P 500 index up by more than 20 per cent from its October nadir \u2014 has been met with a wall of money rolling into one of the more defensive equity strategies: covered calls.<\/p>\n
Such is the enthusiasm for this risk-averse strategy that the largest US-listed covered call exchange traded fund, the $26.8bn JPMorgan Equity Premium Income ETF (JEPI) has not only attracted the largest inflows of any actively managed ETF this year, but also become the largest active vehicle to boot. \u201cI\u2019m shocked that we have gone from the meme stock boom to covered call strategies, it\u2019s kind of like whiplash,\u201d said Bryan Armour, director of passive strategies research, North America at Morningstar.<\/p>\n
Now, rivals such as Goldman Sachs are lining up to launch their own \u201cme-too\u201d funds in an attempt to share in the bounty. JEPI\u2019s strategy involves selling \u201cslightly\u201d out-of-the-money S&P 500 call options, allowing the purchasers to buy the index at a set price and a fixed expiration date.<\/p>\n
If the index rises sufficiently for this option to be triggered, this caps upside returns for JEPI\u2019s investors, meaning they may underperform the benchmark. However, JEPI pockets the premium income from writing the options irrespective of what happens \u2014 cushioning investors if the options are triggered, or helping them outperform the index if they are not. Moreover, JEPI is designed to have a \u201cdefensive\u201d equity portfolio, further reducing risk.<\/p>\n
\u201cCovered call strategies really started to gain traction with investors last year when there was more downside in the market\u2009.\u2009.\u2009.\u2009they were a way for investors to get above average income without taking on undue risk,\u201d said Todd Rosenbluth, head of research at VettaFi, a consultancy. \u201cI\u2019m slightly surprised that they have seen continued demand for the strategy in 2023, but I think there is a nervousness given how concentrated the market has been towards a handful of stocks, and covered call strategies offer a way to participate without necessarily owning the large growth stocks,\u201d Rosenbluth added.<\/p>\n
Bryon Lake, global head of ETF solutions at JPMorgan, believed JEPI took off last year because investors who use bonds to generate income \u201cmaybe didn\u2019t want to take on duration risk\u201d at a time of \u201cvery aggressive rate rises\u201d. This year it is benefiting from \u201ccontinued uncertainty\u201d. \u201cWhat we are hearing from investors is they don\u2019t necessarily trust this rally and they are a little bit sceptical that it\u2019s going to continue,\u201d said Lake, who also noted that JEPI now had a three-year track record, a milestone that some investors await before looking seriously at a fund.<\/p>\n
Whatever the drivers, JEPI has had net inflows of $9.7bn this year, according to VettaFi\u2019s data, a tally beaten by only two ETFs, both passive: Vanguard S&P 500 ETF (VOO) and iShares 20+ Year Treasury Bond ETF (TLT).<\/p>\n
In the process it has overtaken the $24.1bn JPMorgan Ultra-Short Income ETF (JPST) as the world\u2019s largest active ETF. Other covered call ETFs have also been popular, with the sister JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), the second most popular active ETF this year, with $2.1bn of inflows, and Global X\u2019s Nasdaq 100 Covered Call ETF (QYLD) up to $7.9bn of assets after $1.6bn of new money in the past year. \u201cIt\u2019s the category as a whole.<\/p>\n
There has been broad adoption,\u201d Rosenbluth said. \u201cMoney is going into JEPQ and not QQQ [Invesco\u2019s plain vanilla Nasdaq 100 ETF].\u201d Not everyone is a fan of the covered call concept, though. \u201cIt\u2019s a way to earn extra income when markets move sideways, but the challenge is the market timing element. Just because they are sideways today does not mean they will be sideways tomorrow,\u201d said Armour.<\/p>\n
The problem to him is that \u201cmarkets tend to have extreme returns,\u201d rather than exhibiting the classic bell curve normal distribution of returns. \u201cWe see fat tails, there are larger drawdowns and bigger gains more often than we would expect from a normal distribution,\u201d Armour said. \u201c[With a covered call strategy] you maintain exposure to the bad end of the fat tail. If the market tanks you will lose most of it, but you are giving up the good end of the fat tail, the upside.<\/p>\n
Giving up the upside over the long term is not a worthwhile endeavour,\u201d he argued. As an illustration QYLD, the longest-running of the products, has generated an annualised return of 7.1 per cent since inception in December 13, while QQQ has delivered 15.8 per cent over the same period.<\/p>\n
Despite this, Lake maintained JEPI and JEPQ were long-term buy-and-hold products. Latest news on ETFs Visit the ETF Hub to find out more and to explore our in-depth data and comparison tools helping you to understand everything from performance to ESG ratings \u201cWe are having fewer conversations around [returns] relative to benchmark and more conversations around what clients are trying to achieve,\u201d he said, which may be \u201ca good quality of life in retirement\u201d.<\/p>\n
Rivals are now after their share of the pie, principally Goldman Sachs, which has filed to launch US Equity Premium Income and US Tech Index Equity Premium Income ETFs, potentially mirror images of JEPI and JEPQ. Armour was unconvinced Goldman would be able to elbow the incumbents aside. \u201cI don\u2019t see them coming in and taking significant market share from JPM,\u201d he said. \u201cThere has been a divergence between JPM pushing hard into the ETF space and Goldman taking their foot off the pedal.\u201d Goldman declined to comment. Lake was also relaxed about the competition. \u201cClients see us as a leader in this space,\u201d he said. \u201cWe hope we don\u2019t get another 2022, but the fact we were able to show what JEPI did in that market is very valuable. The proof is in the pudding.\u201d<\/p>\n
First published in the Financial Times on 20 June 2023 - Article by Steve Johnson<\/pre>\n","protected":false},"excerpt":{"rendered":"The wall of money means the defensive fund has become the largest active ETF Only two ETFs have had larger inflows this year, both of…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1309","post","type-post","status-publish","format-standard","hentry","category-innov8ions"],"_links":{"self":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1309","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/comments?post=1309"}],"version-history":[{"count":2,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1309\/revisions"}],"predecessor-version":[{"id":1312,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1309\/revisions\/1312"}],"wp:attachment":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/media?parent=1309"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/categories?post=1309"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/tags?post=1309"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}