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There's an ETF that has been the talk of the town lately. No, I'm not talking about Charles Schwab’s SCHD. This is about the premium income ETF JEPI from JPMorgan Chase. This high yielding ETF has garnered the attention of many investors in recent days.

Therefore, we will discuss the details of the ETF, what it's composed of, and whether or not there is a spot for it in your portfolio. Let’s dive in.

JEPI ETF – JPMorgan Chase

So, what is the JEPI ETF? To start, JPMorgan owns and manages the Premium Equity Income ETF. There are several advantages to this ETF.

First, this ETF pays monthly. When you have the likes of Realty Income (O), the monthly dividend paying REIT, who doesn’t like an ETF that pays monthly? That is one big draw to the ETF; a monthly cash flow.

Second, the ETF holds stock various positions. In fact, it holds 10 huge names that we have in our dividend stock portfolios. These dividend growth stock names include AbbVie (ABBV), Coca-Cola (KO), Visa (V), and MasterCard (MA), to name a few. They also hold alternative/option-based assets in this ETF.

Third, piggy-backing off of the last point made is the option approach within this ETF. The managers, whom have over 60 years of experience with options, write out-of-the-money S&P 500 call options in order to produce monthly income on the ETF. Obviously, that is where the increased risk of the ETF is, and you may not be 100% certain of what dividend/distribution you may be receiving.

Lastly, the fund has only been around for two years. Per their website, here is how the fund has performed thus far:

Monthly Income

Now for the fun part and why everyone seems love JEPI: the income this ETF provides. Let’s look at the last plethora of distributions:

The monthly distribution has fallen throughout the last year - from $0.62102 down to a recent $0.44506, that's a decline of 28%. In addition, the stock price for JEPI has also declined close to 9% in the last year.

In effect, the ETF distribution has been declining along with the share price. The price being down 8.54% is worse than the S&P 500, which is down 3.34% during the same time period. Now, granted, you would have also received monthly distributions along the way.

Now, the rolling 12 months, per the JEPI website, is yielding 11.31% with a 30-day SEC yield of 9.59% and a published dividend yield of 8.88%. Therefore, one could likely say your yield will average between 8.50% and 11.50% while owning the ETF, if we use the range of yields published.

Investing $1,000 into this ETF could easily produce you $85-115 in income terms. However, what about taxes?

Taxes

Investors would be receiving this high yield, but what about at tax time? How is this monthly income taxed?

In short, you would be taxed at ordinary and qualified dividend income levels -- in other words, at your ordinary income rate and at your long-term capital gains tax rate. More than likely, a majority of the income would be taxed at your ordinary income rate.

To provide an example, if Verizon's (VZ) yield is 7%, the after-tax yield is approximately 5.95%, if you pay 15% taxes on the qualified dividend income.

With JEPI, let’s argue the ETF has a 10% yield and the combination of income is 85% ordinary and 15% qualified. If we take 10% x 85% x (1- 22%) (ordinary income tax rate) = 6.63% + 10% X 15% X (1-15%) = 7.90% overall yield, after tax.

Therefore, as you can see, the yield after tax will be ~2% lower than what the published yield is, from a taxable account standpoint, where the yield on a qualified dividend from owning dividend stocks is reduced by ~1%.

I wanted to showcase the true net yield after taxes on the JEPI ETF to help those understand where a break-even point may be when compared to a company that produces a dividend vs. an ETF that has an ever-changing monthly distribution.

Conclusion on JEPI - For Now

Will I be buying the JEPI ETF right now? More than likely not. Do I see where portfolios could benefit from JEPI? Absolutely.

If you are in a lower to 0% income bracket, then investing in JEPI may actually increase your income without impacting your taxes. Now, I don’t recommend 100% allocation, but something at or below a 5% allocation to juice up income may not be a bad idea.

In addition, if you are on the verge of being financially free and need a bump in passive income, investing in JEPI may be a great idea, especially if it closes the gap to reach financial freedom.

$10,000 invested would produce close to $800 per year, and imagine if you could spend/invest $30,000 and produce $2,400 or $200/month in income from this ETF? It could be a strategy to close the gap if you need just a few more hundred or thousand to reach financial freedom without sacrificing your total portfolio's ability to grow income and value.

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