JPMorgan's Highly Successful 'Income' ETF Facing Challenges in Bond Market

One of the most successful investments in the $6.6 trillion exchange-traded fund industry last year was bonds. However, in 2023, the bond market is expected to be a major competitor.

Income streams were in high demand last year as volatility reverberated across asset classes, fueled by inflation and the Federal Reserve’s efforts to cool it. That powered a wave of payout-oriented fund launches, and funneled billions into the likes of the JPMorgan Equity Premium Income ETF (ticker JEPI), whose nearly $13 billion haul shattered the annual record for active ETF inflows, Bloomberg Intelligence data show.

As yields on Treasuries and blue-chip corporate debt approach 4% and 5% respectively, many money managers are now favoring bonds over equities as recession fears grow and Wall Street warns of a coming reckoning for corporate earnings. However, while higher yields may cool momentum for JEPI, the fund’s premise of investing in stocks that maintain their relative price should continue to stoke investors’ appetite, according to Strategas Securities.

Todd Sohn, ETF strategist at Strategas, said that while there is an argument for income competition, if he must have equity exposure, there is likely still a tilt towards JEPI because of its low volatility profile.

JEPI employs a call-writing strategy in addition to low-volatility equities. As a result, JEPI dropped just 3.5% on a total-return basis in 2022, compared to an 18% wipeout in the S&P 500.

The minimal damage caused by the pandemic led to robust demand for JEPI last year. The close to $13 billion that poured into the fund easily topped the previous record for active ETF inflows, set by Cathie Wood’s Ark Innovation ETF (ARKK) in 2020 with $9.6 billion. JEPI has continued to lure cash in the first trading days of 2023 and hasn’t posted an outflow since October.

Bonds are providing an alternative to JEPI now, but the fund's portfolio of "steady-eddy stocks" with reliable earnings should attract investors looking to safeguard their holdings in 2023, the fund's portfolio manager said.

"Volatility is on the rise, and investors are looking for ways to protect their portfolios," said Hamilton Reiner, head of US equity derivatives at JPMorgan Asset Management. "Income-producing investments like ETFs can help to dampen volatility and provide a defensive equity allocation."