One of the biggest hits in the $6.6 trillion exchange-traded fund industry last year has a worthy opponent in 2023: the bond market.
(Bloomberg) — One of the biggest hits in the $6.6 trillion exchange-traded fund industry last year has a worthy opponent in 2023: the bond market.
Steady income streams were in high demand last year as volatility reverberated across asset classes this past year, fueled by the worst inflation in a generation 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.
Now, with yields approaching 4% on Treasuries and 5% for blue-chip corporate debt, the calculus for many money managers has shifted in favor of bonds over equities as recession fears grow and Wall Street warns of a coming reckoning for corporate earnings. But 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.
“There’s an argument for the income competition — maybe I don’t need to put the bulk of my income sleeve to JEPI,” said Todd Sohn, ETF strategist at Strategas. “But if I must have equity exposure, there’s likely still a tilt there because of the low volatility profile.”
In addition to low-volatility equities, JEPI also employs a call-writing strategy. 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.
That minimal damage led to robust demand. The close to $13 billion that poured into JEPI last year 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.
While the income provided by bonds now provides an alternative to JEPI, 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.
“It still fits in people’s portfolios, because when thinking about volatility, markets are going to be more volatile. And anything you can do to help dampen the volatility of an investor’s portfolio will add value,” Hamilton Reiner, head of US equity derivatives at JPMorgan Asset Management, said on Bloomberg Television’s ETF IQ. “I think people are going to continue to use it from an income perspective, but we’re going to see even more people use it as a defensive equity allocation.”
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