My $100,000 Dividend Portfolio Decision — JEPI, SPYI, Or XYLD

• So far in 2024, SPYI has offered a higher yield at 8.9% against JEPI’s 5.1% and XYLD’s 6.9%.
• Both XYLD and SPYI benefit from more favorable tax treatment due to Section 1256 contracts, which could mean more net income after taxes compared to JEPI.
• JEPI has delivered a total return of 13.3% during the first nine months of 2024 — capturing only 58% of the S&P 500 Index's total return. 
• If broad market strength continues, SPYI’s strategy seems better positioned due to its out-of-the-money calls and diversified holdings. 
• In volatile or declining markets, JEPI’s lower volatility might appeal to those prioritizing principal protection over total return.

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Introduction

2024 has been quite the year thus far — especially for income-focused investors. 

We saw ETFs like the Amplify CWP Enhanced Dividend Income ETF DIVO and Schwab U.S. Dividend Equity ETF SCHD break out to new all-time-highs — driven by broad-based market breadth. While other riskier ETFs like the Defiance Nasdaq 100 Enhanced Options 0DTE Income ETF QQQY lose -35% of their share price while delivering single-digit total returns year-to-date. 

It has never been harder for income-focused investors to balance perceived risk with long-term gains. In this post, I want to share a year-to-date update on my "perfect balance" income-focused ETF that holds over $100K of my hard earned money.

2024 In Review

If you're an income-focused investor like me, your portfolio is anchored by covered call ETFs that are benchmarked against the total return of the S&P 500. Unfortunately for some investors, 2024 is proving that not every S&P 500 covered call ETF is made equal. 

Now before you all come after me with "You can't compare JEPI to the S&P 500 Index! JEPI doesn't hold the same stocks, it's a completely different strategy!" 

You're right. However, the fund's investment objective as shared in their summary prospectus states the following:

"The investment objective of the Fund is to seek current income while maintaining prospects for capital appreciation. 
The Fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the Fund's primary benchmark, the Standard & Poor's 500 Total Return Index (S&P 500 Index)…"

And as shown below on Morningstar, JEPI's benchmark index is the S&P 500. 

Now that we're all on the same page, let's dive into the numbers, starting with JEPI. 

JPMorgan Equity Premium ETF

The total return of JEPI thus far in 2024 is 13.3%, capturing only 58% of the total return of the S&P 500 Index.

As we all know, the S&P 500 Index was led higher in 2023 by the Magnificent Seven — seven stocks JEPI's JEPI fund managers understandably decided to leave out of the fund's holdings. In 2024, however, given the broad-based strength of the market JEPI was able to participate meaningfully more in the continued upside the S&P 500 experienced. 

58% total return capture in 2024 is better than the fund's only 37% total return capture in 2023, but still not enough to excite an income-focused investor also looking for price appreciation. 

As stated in the summary prospectus, "The Fund seeks a lower volatility level than the S&P 500 Index." JEPI certainly achieved this, as the price of their shares only slipped -3.3% during the -7.9% drawdown the S&P 500 experienced between July and August of 2024. And when you add monthly distributions to that figure, risk-averse investors become increasingly happier — a win in my book. 

However, it's equally as important to ask yourself the question "Is the return I see the return I get?"

JEPI uses Equity Linked Notes (ELNs) to generate monthly income for their investors. In the eyes of the IRS, the income generated by these ELNs are taxed as ordinary income — meaning after taxes, this 13.3% figure might be materially lower for some folks depending on their tax brackets. 

As a fellow JEPI investor, I'm constantly weighing my opportunity cost. By choosing JEPI over the next best thing, I'm capturing only 58% of the S&P 500's total return. Sure, I'm doing so in an effort to smooth out the volatility of my portfolio while also generating monthly income — but at the expense of upside potential and higher taxes. 

Let's move on.

Global X S&P 500 Covered Call ETF

The total return of XYLD thus far in 2024 is 13.0%, capturing only 57% of the total return of the S&P 500 Index. XYLD marginally underperformed JEPI by -0.3%, which is weird considering the fund held "all the equity securities in the S&P 500 Index in substantially similar weight."

But if the fund held all of the constituents of the S&P 500, why did it underperform the index by nearly half?

Unfortunately for my fellow XYLD investors, because the fund wrote at-the-money (ATM) covered calls against their holdings their total upside was capped at just the premium generated by the option contracts.

According to XYLD's summary prospectus…

"The Fund writes a single “at-the-money” call option, which is when the strike price is near to the market price of the underlying asset, as determined on the monthly option writing date of the Underlying Index in accordance with the Underlying Index methodology. 

The Fund’s covered call options may partially protect the Fund from a decline in the price of the Reference Index through means of the premiums received by the Fund. However, when the equity market is rallying rapidly, the Underlying Index is expected to underperform the Reference Index."

And underperform it did. 

However, unlike JEPI, XYLD uses Section 1256 contracts to generate their monthly income for investors. These Section 1256 contracts are treated much more favorably than ELNs in the eyes of the IRS — with income to be taxed as 60% long-term capital gains and 40% short-term, allowing investors to keep more of that 9.7% yield come tax time in April.

NEOS S&P 500 High Income ETF

The total return on SPYI thus far in 2024 is 16.5%, capturing over 72% of the S&P 500 Index's total return. SPYI SPYI has been able to outperform both XYLD and JEPI in 2024 by 3.5% and 3.2%, respectively. SPYI is able to do this by "investing in a portfolio of stocks that make up the S&P 500 Index," while also implementing a covered call option strategy that writes covered call option contracts up to 5% out-of-the-money. 

Let's take a look at SPYI's holdings (as of 10/7/24) to get a better understanding as to why this covered call ETF outperformed its competitors by such a wide margin:

As you can see above, the management team behind SPYI decided to write two covered call option contracts against the S&P 500 expiring on November 11th at the strike prices of 5,840 and 5,910. Assuming these contracts are rolled monthly, something SPYI's management team has stated in multiple interviews, they were likely written early-October. 

The S&P 500 Index was trading around ~5,700 during this time frame — which means their management team wrote these option contracts 2.5% and 3.7% out-of-the-money. These percentage points might not seem like a big deal, but when we have weeks like we did when these contracts were written (new all-time-highs in the S&P 500 Index), writing out-of-the-money contracts vs. at-the-money contracts can really move the needle from a total return perspective. 

For added color, below are XYLD's covered call option contracts (as of 10/7/24) — choosing to write option contracts at the 5,690 strike price. At time of writing, the S&P 500 is 5,750 — which would mean investors in XYLD aren't capturing any upside beyond 5,690 at the moment.

Similar to XYLD, SPYI uses Section 1256 contracts to generate their monthly income for investors — allowing them to keep more of that 12.11% annual distribution yield in their pockets when Uncle Sam comes knocking. 

All in all, SPYI has offered material outperformance against XYLD and JEPI thus far in 2024 — from an income generation, total return, and tax-efficiency perspective. 

JEPI has paid out $3.05 per share so far this year, a 5.1% yield against their $59.11 closing price on September 30, 2024. XYLD has paid out $2.88 per share so far this year, a 6.9% yield against their $41.50 closing price on September 30, 2024. SPYI paid out $4.57 per share so far this year, an 8.9% yield against their $51.23 closing price on September 30, 2024.

That's a 3.8% higher yield than JEPI, and 2.0% higher yield than XYLD.

What Does Q4 Have In Store For Income-Focused Investors?

It's hard to say. 

2023 was dominated by AI, as has been some aspects of 2024. However, I'd argue 2024 — especially after the Fed signaled upcoming rate cuts — was accompanied by broad-based strength as AI-related earnings acceleration by the Mag 7 has lapsed and the "S&P 493" begins to deliver an uptick in earnings growth for the first time since 2021.

Additionally, BofA's Global Fund Manager Survey tells us that over half of FMS investors say no recession for the US in the next 18-months. Now you can agree or disagree with their assumption — that's not the point. The point is this is the assumption these money managers are using to position their portfolios.

And as the Fed cuts rates, the most important factor to keep an eye on is if the US economy will avoid a recession or not. If we do, history tells us there's more upside to be had over the coming 12-24 months. If we do not, these covered call ETFs will become an increasingly larger position in my portfolio as I weather the storm.

Conclusion

As a fellow income-focused investor, I'm always weighing my options in efforts to determine the best possible way to invest my money. At time of writing, I'm not sure JEPI is the answer here. 

If markets continue to rally because of broad-based strength, both XYLD and SPYI's underlying portfolios would likely benefit from their exposure to these types of companies. With that being said, I do acknowledge that XYLD's option contracts are written at-the-money, while JEPI and SPYI seem to be written slightly out-of-the-money. If markets fall, both XYLD and SPYI offer a higher annualized distribution yield than JEPI, offsetting potential downward pressure on price. If markets rally, fall, trade sideways, or even in circles — both XYLD and SPYI will offer more tax-efficient income for their investors given their Section 1256 contracts. 

Based on the factors shared in this analysis, I've chosen SPYI to be a six-figure core holding inside of my income-focused portfolio.

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Disclaimer:

This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Austin Hankwitz is a writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking. In some circumstances, he has a business relationship with a company whose stock is mentioned in this article.

Each investor is responsible to conduct their own due diligence and to understand the risks associated with any information that is reviewed. The information contained herein does not constitute and shouldn’t be construed as a solicitation of advisory services. Consult a registered financial advisor and/or certified financial planner before making any investment decisions.