Active Alternatives to Dividend ETFs

Active ETF – Rise – Fall – Invest

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

These two themes create a powerful combination.

While investors are unlikely to lose interest in the largest dividend exchange-traded funds, the Vanguard Dividend Appreciation ETF (VIG) and the Schwab American Dividend Stock ETF (SCHD)they are looking for equity income alternatives.

For Dividend ETF Alternatives, Investors Choose active management to achieve attractive returns while minimizing downside risks. A great example is the largest actively managed ETF, the $33 billion fund. 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. Although this strategy tends to limit upside potential, JEPI’s price performance and yield have both outperformed bonds over the past three years.

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

In a market environment characterized by low dividend yields and increasing downside risks for stocks, actively managed income ETFs like JEPI and DIVO will likely 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.

Breakdown of the JEPI and DIVO ETFs

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

• Performance: Exposure to DIVO’s dividend stocks allows it to win the performance battle with a year-to-date gain of almost 7%, compared to a gain of just over 5% for JEPI. DIVO also wins the 1-year return while both ETFs have similar 3-year returns.

• Assets under management: 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 rate: JEPI’s expenses are less than 0.35% while DIVO’s expense ratio is 0.56%.

For a complete breakdown of these equity income ETFs, see the JEPI and DIVO ETF analysis with the ETF.com comparator.

Conclusion on Covered Call ETFs

Covered Call ETFs like JEPI and DIVO may be suitable for investors looking for income and a hedge against volatility. However, they must take into account the risks associated with the strategy, in particular 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.

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