The Goldman Sachs S&P 500 Premium Income ETF (NASDAQ:GPIX) delivered an impressive 17% total return over the past year, outshining the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI), which returned approximately 9% during the same period. While both ETFs aim to generate income by selling call options against the S&P 500 index and offer similar yields—GPIX at 8.3% and JEPI at 8%—their structural differences have led to a significant divergence in performance. JEPI, despite its lower return, remains considerably larger, boasting $45 billion in assets compared to GPIX's $4.7 billion.
Decoding Monthly Income Strategies
Both GPIX and JEPI employ covered call strategies to generate monthly payments. In this approach, investors sell call options on underlying stocks, earning premium income. The seller retains the premium but caps potential gains above the strike price.
JEPI's strategy involves an actively managed portfolio of U.S. large-cap stocks, selected for lower volatility. Its income is derived indirectly through equity-linked notes (ELNs) where the payout is tied to selling out-of-the-money S&P 500 call options. These notes are issued by various large banks, with JEPI diversifying its counterparty risk across multiple institutions.
In contrast, GPIX directly owns the S&P 500 index components. It dynamically sells call options on a portion of its holdings, typically between 25% and 75% of the notional value. This structure allows GPIX to participate more fully in market rallies through its un-obligated shares.
The disparity in returns can be largely attributed to how each fund weights its holdings, particularly major tech stocks. At the end of June, Apple (NASDAQ:AAPL) represented 6.5% of GPIX's net assets, mirroring its weighting in the S&P 500. JEPI, however, held Apple at a much lower 1.5%. Similarly, Alphabet (NASDAQ:GOOGL) was 4% of GPIX versus 1.5% of JEPI. JEPI's largest holding was AbbVie (NYSE:ABBV) at 1.7%.
This difference in concentration significantly impacted performance during a period where large-cap technology stocks led the market. GPIX, by holding these giants at index weight and leaving a portion of its portfolio unhedged, captured substantial gains. JEPI's lower weighting in these stocks and the capped upside from its ELNs meant it lagged behind during the tech rally.
Risks and Considerations
While GPIX offers higher returns, it also tracks the index more closely, meaning it could experience steeper declines during market downturns. Since its launch in October 2023, GPIX has not yet experienced a full bear market. Investors should anticipate that it may fall more in line with the index when such a period arrives.
JEPI's ELN structure introduces counterparty risk, although this is mitigated by diversification across multiple issuers. However, GPIX avoids this specific risk by directly selling options and receiving premiums upfront.
Tax implications also vary. Distributions from option income funds may be taxed as ordinary income in taxable accounts, potentially reducing the net yield received. Investors should consult tax documents for specific details, especially when holding these ETFs in tax-advantaged accounts like IRAs, where tax character is less critical.
Choosing the Right ETF
GPIX is suitable for investors seeking to remain closely aligned with the S&P 500 while benefiting from enhanced income, provided they can tolerate potentially larger drawdowns. JEPI appeals to those prioritizing a smoother investment experience and are willing to forgo some upside potential in exchange for reduced volatility and exposure to bank credit via its ELNs. The choice depends on an investor's risk tolerance and investment objectives.
Contact Ryne Mauck for any questions or corrections.
