1 Unique S&P 500 ETF for Those Seeking Passive Income and Less Volatility

The S&P 500 index is one of the most popular investing benchmarks. Over the past three decades, the broad-market index has produced a nearly 10% average annualized total return. Because of that, many investors opt to match the index’s returns by investing in an exchange-traded fund (ETF) designed to track it.

While traditional S&P 500 ETFs provide investors with returns roughly matching that broader market index, they have some drawbacks. They don’t provide much income (the S&P 500’s dividend yield is around 1.3%) and expose investors to stock market volatility. Investors seeking more income with less volatility have many options, including the JPMorgan Equity Premium Income ETF (JEPI 0.10%). Here’s a closer look at this unique S&P 500 ETF.

A dual strategy to deliver on its mandate

JPMorgan Equity Premium Income ETF aims to provide investors with monthly income and equity market exposure with less volatility than the broader market. The actively managed ETF has a two-pronged strategy to deliver on its objective.

Instead of owning all the stocks in the S&P 500, this ETF writes out-of-the-money call options on the S&P 500 index. This strategy generates options premium income, which the fund distributes to investors each month. Options premiums tend to be higher during periods of market volatility. That enables the fund to benefit from volatility by generating more income for investors.

The second leg of its strategy is to hold a defensive portfolio of stocks selected based on its proprietary risk-adjusted stock rankings. The ETF currently holds about 100 stocks. It focuses more on quality than quantity. It also has a more equal-weighted allocation to its top holdings. For example, its top 10 holdings (which include tech titans Microsoft, Amazon, Meta, and Alphabet) make up less than 16% of its net assets. That’s about half the weighting as the top 10 stocks in the S&P 500. Having a lower concentration among its top holdings helps reduce volatility.

Income and equity market exposure with less volatility

The big draw of the JPMorgan Equity Premium Income ETF is its monthly cash distribution. This payout rises and falls each month, mainly due to market volatility:

JEPI Dividend data by YCharts

During periods of high volatility, the ETF will generate more options premium income to distribute to investors.

Over the past year, the ETF has delivered a dividend yield of around 8%. That’s significantly higher than other asset classes. It’s closer to the yield investors could earn on high-yield junk bonds (7.7%) these days. While the payout will continue fluctuating, it should add up to a significantly above-average income stream over the long term.

Further, the ETF enables investors to potentially earn higher total returns than fixed-income investments with less volatility than the S&P 500.

^SPXTR data by YCharts

While the ETF hasn’t outperformed the S&P 500 since its inception three years ago, it has delivered a solid total return. It did that by producing steadier returns (from income and price appreciation) with less pronounced peaks and valleys.

The fund’s more defensive posture will cost it returns during strong market rallies. For example, it’s currently underweight semiconductor giant Nvidia (0.4% allocation compared to 5% in the S&P 500), which has detracted from its result. Shares of Nvidia have soared this year, driven up by accelerating demand for its chips to power AI applications. However, while being underweight Nvidia has been a headwind this year, it might be a positive in the future if the semiconductor stock were to endure a steep sell-off.

Earning income and upside

JPMorgan Equity Premium Income ETF enables investors to capitalize on the S&P 500’s volatility. During periods of market volatility, this ETF will generate more options premium income to distribute to investors. While investors give up some of their equity upside potential, the fund can still produce higher total returns than many income-focused investments. That can make it a great complement to a portfolio, helping investors earn more income while smoothing out their returns.