Bonds Used to Be the Income Answer for Retirees. Then Came the Covered-Call ETF That Pays Over 7%.

In 2020, the Covid-19 recession led central banks to cut interest rates worldwide to stimulate economic activity. Bond prices rose and yields fell, and 30-year mortgage rates dropped from 3.75% to 3.0% by summer. Businesses recovered somewhat, but retirees relying on fixed-income investments faced reduced income. Wall Street responded with synthetic products designed to generate higher income, including covered call option strategies. Invesco introduced a covered call approach in 2007, and later firms expanded it into ETF catalogs with variations that emphasized volatility. JP Morgan launched the Equity Premium Income ETF (JEPI), selecting dividend-paying S&P 500 stocks while selling near-term out-of-the-money calls. A portion of assets is used to package calls into equity linked notes that act as synthetic out-of-the-money calls.

"In 2020, the global economy descended into recession during the Covid-19 pandemic. Central banks around the world enacted an across the board interest rate cut in an effort to stimulate activity to revive the economy. Markets responded. Bond prices rose, reducing yield significantly. 30-year mortgage rates, which started at 3.75%, fell to 3.0% by that summer. Although businesses managed to regain ground, the low interest rates severely impacted retirees, especially those who rely on fixed-income investments for their retirement nest eggs."

"Wall Street developed a slew of synthetic financial products to address the soaring demand for income. The notion of using a covered call option strategy to create premium income had long been utilised by options traders and was initially introduced by Invesco in 2007. However, this strategy was adopted with some additional tweaks by several firms, such as YieldMax, who created an entire catalog of ETFs with variations on this income model for both single stocks as well as portfolios of different stocks, with volatility a crucial component."

"Banking titan JP Morgan entered the fray in 2020 with its own take on a covered call ETF: JP Morgan Equity Premium Income ETF (NYSE: JEPI). JEPI also advertises regularly on Fox Business News and MSNBC. However, the JP Morgan name doesn't necessarily mean the ETF is for everyone."

"The JP Morgan Equity Premium Income ETF is a fund that cherry picks solidly reliable dividend paying stocks from the S&P 500 Index. Unlike with some of its competitors, especially YieldMax, attention is paid to those stocks that overly volatile. It sells near-term out-of-the money calls. 15% of JEPI assets are used to package the calls into Equity Linked Notes (ELN) that serve as synthetic out-of-the-money calls against the port"

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