Active Alternatives to Dividend ETFs

Investors love dividend ETFs and active management is on the rise.

Those two themes create a powerful match.

While investors are unlikely to fall out of love with the largest dividend exchange-traded funds, the Vanguard Dividend Appreciation ETF (VIG) and the Schwab US Dividend Equity ETF (SCHD)they have been seeking equity income alternatives.

For dividend ETF alternatives, investors are choosing active management to capture attractive yields while minimizing downside risks. A prime example is the largest actively managed ETF, the $33 billion JPMorgan Equity Premium Income ETF (JEPI).

JEPI holds equity linked notes and writes covered call options to provide high income while attempting to produce the same return as the S&P 500 Index with lower volatility. While this strategy tends to cap upside potential, JEPI’s price performance and yield have both outpaced bonds in the past three years.

JEPI’s popularity has driven investors to similar strategies. For example, the Amplify CWP Enhanced Dividend Income ETF (DIVO) attempts to provide above-average yields with a combination of dividends and option premiums.

In a market environment of low dividend yields and increasing downside risks for equities, actively managed income ETFs like JEPI and DIVO are likely to remain popular alternatives to traditional dividend ETFs.

JEPI vs. DIVO: Active Equity Income ETFs

Data as of May 7, 2024. Yields are current distribution yields.

Breaking Down JEPI vs DIVO ETFs

• Yield: JEPI has the edge here with its yield of 7.5% while DIVO’s of 4.9% still beats the yield for most traditional dividend ETFs.

• performance: DIVO’s dividend equity exposure helps it win the performance battle with a year-to-date gain of nearly 7%, compared to JEPI’s gain of just over 5%. DIVO also wins the 1-year return while both ETFs have similar 3-year returns.

• OMG: JEPI is the largest active ETF with $33 billion in assets under management while DIVO is smaller but still respectable at just over $3 billion.

• Expense ratio: JEPI’s expenses are lower at 0.35% while DIVO’s expense ratio is 0.56%.

For a full breakdown of these equity income ETFs, see the JEPI vs DIVO ETF analysis with etf.com’s comparison tool.

Bottom Line on Covered Call ETFs

Covered call ETFs like JEPI and DIVO can be appropriate for investors seeking income and a hedge against volatility. However, they should consider the risks associated with the strategy, including market risk and counterparty risk. As with any investment, investors should carefully evaluate their investment objectives, risk tolerance, and time horizon before investing in these funds.

Story continues

Permalink | © Copyright 2024 etf.com. All rights reserved