Quick Read
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Different approaches, similar objective: JEPI uses actively managed stocks and equity-linked notes, while WEEL systematically implements the options wheel strategy to generate income from both puts and covered calls.
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Income comes with trade-offs: Both ETFs produce yields approaching or exceeding 10%, but investors give up some upside participation and should carefully consider fees and tax treatment.
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Best suited for sideways markets: These strategies have historically been most effective when stocks remain range-bound and option premiums stay elevated, rather than during strong bull markets.
One of the strongest predictors of future stock returns has historically been starting valuation. The more investors pay for each dollar of corporate earnings today, the lower the returns they can generally expect over the following decade. That doesn’t mean the market is about to crash, but it does suggest investors should temper expectations when valuations become stretched.
The S&P 500 has unquestionably been an excellent long-term investment, but it hasn’t always delivered positive returns over every decade. Between roughly 1999 and 2009, investors experienced a “lost decade” in which the index produced essentially flat nominal returns and negative real returns after inflation. It’s entirely possible to imagine another environment similar to 2022, characterized by elevated interest rates, persistent inflation, and repeated bear market rallies that ultimately go nowhere, lasting longer than many investors expect.
Those are the types of markets where option-income ETFs can have their day in the sun. By exchanging a portion of future upside for immediate option premium, these strategies can outperform when stocks struggle to make sustained progress. No strategy wins in every environment, but for investors who believe the next several years could be range-bound rather than strongly bullish, these two ETFs are worth a closer look.
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JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF (JEPI) combines two separate strategies. The first is an actively managed portfolio of roughly 90 to 130 relatively defensive large-cap U.S. stocks selected with an emphasis on lower volatility, attractive valuations, and strong fundamentals. The second is an allocation of up to roughly 15% of assets to equity-linked notes (ELNs), which provide the economic payoff of selling one-month out-of-the-money S&P 500 call options.
The result is a strategy that sacrifices part of the market’s upside in exchange for a much higher stream of current income. As of the latest data, JEPI offers a 7.94% distribution yield while charging a relatively modest 0.35% expense ratio.
The biggest drawback is tax efficiency. Because much of the income is generated through ELNs, distributions are generally taxed as ordinary income rather than benefiting from the more favorable treatment available to certain index option strategies. That makes JEPI particularly well suited for tax-advantaged accounts such as Roth IRAs or Traditional IRAs.
Investors should also remember that strong bull markets are not JEPI’s ideal environment. If the S&P 500 rallies sharply, the covered call exposure embedded within the ELNs will naturally limit upside participation.
Peerless Options Wheel Income ETF (WEEL)
The Peerless Options Wheel Income ETF (WEEL) takes a very different approach. Rather than focusing primarily on covered calls via ELNs, it systematically implements the well-known options wheel strategy.
The fund begins by selling cash-secured puts on a diversified basket of primarily sector ETFs and other highly liquid funds with listed options. If those options expire worthless, WEEL keeps the premium and repeats the process. If shares are assigned, the strategy shifts to writing covered calls against those newly acquired positions until they’re eventually called away, after which the cycle begins again.
The underlying exposures are dynamic and can include areas such as gold miners, software, biotechnology, emerging markets, utilities, energy services, silver, and other sectors with attractive option premiums. Treasury bills make up a large portion of the portfolio as collateral for the short put positions.
The strategy currently produces an 11.86% distribution rate while carrying a 0.99% net expense ratio after fee waivers. That’s considerably more expensive than JEPI, reflecting both the complexity of the strategy and the use of underlying ETFs.
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