JPMorgan Manager Says His $39 Billion ETF Can Profit From Volatility in 2025 and Can Yield 7%.

As investors brace for a potentially volatile market in 2025, many are shifting their focus toward options strategies to help manage risk and generate income. The market’s fluctuations this year, fueled by factors like the impact of China’s DeepSeek AI model on tech stocks and uncertainties surrounding trade policies from the Trump administration, have highlighted the need for strategies that offer both stability and income potential.

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One area gaining significant traction is the use of options-based exchange-traded funds (ETFs). A standout example is the JPMorgan Equity Premium Income ETF (JEPI), which has long employed options strategies but has seen a surge in popularity recently.

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According to Morningstar, funds like JEPI are part of a rapidly growing segment of the ETF market, often referred to as a “hot corner.” In 2024 alone, derivative income ETFs attracted $33 billion in inflows, pushing total assets in this category to $97 billion—up from just $3 billion at the end of 2020. This remarkable growth underscores how investors are increasingly drawn to strategies that can help them navigate choppy markets while still earning steady income.

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Hamilton Reiner, who heads U.S. equity derivatives at JPMorgan Asset Management and manages the Equity Premium Income ETF, remains optimistic about the broader market’s potential. He predicts that U.S. stocks will achieve low double-digit earnings growth in 2025, extending beyond the well-known "Magnificent Seven" tech giants. Reiner notes that if price-to-earnings (P/E) ratios remain stable or experience only slight declines, the market could see gains in the high single digits to low double digits. This suggests that despite potential headwinds, there are still solid growth opportunities across various sectors.

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However, Reiner also expects market volatility to tick up slightly compared to last year, when the S&P 500 posted an impressive 23% return. This anticipated rise in volatility presents both challenges and opportunities for investors. Reiner believes that JEPI’s options-based approach is well-suited for this environment because it aims to capitalize on higher volatility levels. The fund’s strategy is designed to provide two key benefits: increased income and the potential for additional upside, even in turbulent markets.

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As of January 31, JEPI boasted a 30-day SEC yield of 7.12% and carried an expense ratio of 0.35%. By early February, the fund had amassed $38.71 billion in assets, reflecting its growing appeal among income-seeking investors. Reiner emphasizes that the fund’s primary goal is to strike a balance between generating income and achieving total returns. To accomplish this, the management team carefully selects stocks that they view as fundamentally strong, with consistent earnings performance.

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They also ensure broad diversification across sectors, with no single stock accounting for more than 2% of the portfolio. This approach helps mitigate risks associated with overexposure to individual companies.

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In addition to selecting high-quality stocks, JEPI’s strategy involves selling out-of-the-money options on the S&P 500. This allows the fund to generate income from options premiums while still participating in some of the market’s upside potential. Reiner explains that the team “ladders and staggers” these options, executing a portion of them each week. This method ensures that the strategy is never fully capped, providing ongoing opportunities to benefit from market movements.

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The income generated by JEPI comes from two primary sources: the premiums earned from selling options and the dividends from the stocks held within the portfolio. While dividends are a welcome addition, Reiner stresses that they are not the main factor driving stock selection. Instead, the focus remains on identifying companies with strong fundamentals and sustainable earnings growth.

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Importantly, Reiner notes that JEPI is not intended to replace traditional stock or bond allocations in an investment portfolio. Rather, it is designed to complement these assets. Investors can allocate a portion of their equity or fixed-income holdings to JEPI, maintaining a similar risk profile while enhancing their income potential. This makes the fund a versatile tool for those looking to diversify their income streams without significantly altering their overall investment strategy.

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Another potential use for JEPI, according to Reiner, is as a destination for excess cash. With approximately $6.92 trillion currently sitting in money market funds, many investors are holding large cash positions. While cash may feel like a safe option in the short term, Reiner warns that it can be detrimental to long-term wealth accumulation. “Cash is sort of like that silent killer,” he says. “It feels good today, but when you start thinking about compounding wealth over the next 10, 20, 30 years, you are really going to be left on the sidelines.”

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Reiner’s point highlights a key consideration for investors: while cash provides liquidity and safety, it often fails to keep pace with inflation and misses out on growth opportunities. By contrast, strategies like JEPI offer the potential for higher income and capital appreciation, making them an attractive alternative for long-term investors seeking to optimize their portfolios.

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In summary, as the 2025 market outlook points to increased volatility, options-based ETFs like JEPI are becoming essential tools for income-focused investors. These strategies offer a compelling combination of income generation, growth potential, and risk management. Whether used to complement traditional assets or as a productive alternative to idle cash, options strategies are proving to be a valuable addition to modern investment portfolios.

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