JEPI ETF is beating the S&P 500 index, but a risky pattern has formed

The JPMorgan Equity Premium Income ETF (JEPI) stock price has pulled back in the past few weeks as American equities slumped. JEPI has slumped by about 2% from its highest point this year. Its total return rose by 2.30% this year, compared to the S&P 500 index, which has dropped by 1.73%.

What is the JEPI ETF?

The JPMorgan Equity Premium Income ETF is a popular covered call that has about $40 billion in assets.

It aims to generate returns by investing in 130 American companies in the S&P 500 index, including popular blue-chip firms, including blue-chip names like Abbvie, Progressive, Visa, NVIDIA, Meta Platforms, Amazon, and Analog Devices.

After investing in these companies, JEPI applies the covered call concept to generate returns. It does this by writing or selling the S&P 500 index call options and receiving a premium, which it returns to investors through monthly dividends. 

JEPI is beloved because of its higher dividend payouts to investors. It has a dividend yield of about 7.3%, much higher than the S&P 500 index, which pays about 2% annually. 

The fund is often seen as a better alternative to S&P 500 index ETFs like the Vanguard S&P 500 (VOO) and the SPDR S&P 500 (SPY) ETF in periods when the stock market is facing turbulence. It does this because of the premium it receives when it writes call options on the S&P 500 index.

JPMorgan Equity Premium Income is facing risks

The JEPI ETF is facing several risks that may affect its performance this year. First, there are concerns that Donald Trump’s trade war will affect corporate earnings this year. A good example of this is in the automobile industry, where companies like GM and Ford may see rising costs and weaker demand. 

Companies in other industries will see higher costs. For example, Trane Technology, a company that manufactures HVAC and other related solutions in countries like China and Taiwan will have higher fees.

However, unlike the S&P 500 index, most companies in the portfolio will not be highly affected by these tariffs. These include companies like Salesforce, American Express, ServiceNow, and ExxonMobil. 

JEPI stocks also faces another risk in that corporate earnings may slow down in the next few quarters. This slowdown will likely be because of the ongoing performance of the American economy, which may go through a recession. 

Further, while JEPI pays a higher dividend return than the S&P 500 index, its total return has always lagged. As shown below the total return of the JEPI ETF in the last three years has been 30% compared to the VOO ETF’s 43%. 

JEPI vs VOO ETF chart by SeekingAlpha

JEPI ETF stock has a technical risk

JEPI stock by TradingView

The JPMorgan Equity Premium Income has another technical risk that may push it lower in the coming months. The daily chart shows that the JEPI ETF formed a double-top pattern at $60, and whose neckline is at $56. A double-top is a popular bearish pattern that often leads to further downside.

The stock has crashed below the 50-day moving average, a sign that bears are in control for now. Therefore, the combination of tariffs and the double-top pattern points to further downside in the coming months. If this happens, the next level to watch will be at $56, down by 3.65% below the current level.