Why This ETF With a 9.82% Yield May Be Better Than JEPI
I recently wrote about the Closed-End Fund PDI. PDI generates. In the comments, The Matadore correctly pointed out the very high expense ratio and then arbitech explained how it could be a ticking time bomb due to leverage or “junk debt”. I decided to do some research and found this information about why PDI looks vulnerable from Simply Safe Dividends:
PDI has around a 30% exposure to these recession-sensitive MBS and over a 20% allocation to high-yield credit, which primarily constitutes debt issues from companies deemed speculative by credit rating agencies.
Among these junk bonds are debt securities from Pacific Gas & Electric (~3% of assets) in California, which filed for bankruptcy in 2019 following mounting liabilities from its role in massive wildfires, and Wesco Aircraft Holdings (~4%), which operates under the name Incora.
PDI’s aggressive use of leverage amplifies the risk of investing in securities with higher default rates, with nearly 50% of PDI’s assets funded by debt. Across the more than 220 fixed income CEFs in our database, PDI’s leverage is tied for second-highest.
Because the market has steadily marched upwards since PDI’s inception against a mostly benign credit environment, the fund’s zealous use of debt has juiced income and supported a demanding distribution.
But, when Covid rocked the markets in 2020, the fund’s net asset value (NAV), which reflects the value of a fund’s assets less its liabilities, had a staggering decline of almost 30% in just one month.This volatility demonstrates the downside to relying heavily on leverage and the lack of protection provided by a portfolio of securities with subprime credits.
Now this was written in September 2022, but this still applies in todays market environment. arbitech may just be right. PDI may be a ticking time bomb. During this research, I came across the ETF HIGH. Now this may be my new yield generating fund.
About the Simplify Enhanced Income ETF (HIGH)
The Simplify Enhanced Income ETF (NYSEARCA: HIGH) presents a unique approach to income generation through a distinctive strategy. Unlike conventional methods that involve holding assets and selling calls, HIGH adopts a different stance. The fund primarily invests in short-term Treasury bills while also selling call and put spreads on various stocks and bonds.
Investment Objective
(From Simplify’s Website): HIGH seeks to provide monthly income by maintaining a short-term portfolio comprising of income-producing US Treasury securities and employing an option spread writing strategy.
Investment Strategy
HIGH is actively managed to optimize income generation. It predominantly invests in US Treasury securities with a focus on maintaining a weighted average duration of two years or less. Additionally, the fund utilizes an option spread writing strategy on index-based domestic equity and fixed-income ETFs to enhance income. This strategy involves writing short-dated, out-of-the-money calls or puts while simultaneously purchasing further out-of-the-money calls or puts, depending on the outlook on reference ETFs’ prices.
HIGH expects to hold options until expiration but may adjust positions in response to significant price swings in the reference ETFs. This aims to capitalize on time erosion value and generate additional income.
Performance and Risks
HIGH has demonstrated robust performance, with a distribution yield of 9.4% with low volatility and drawdowns. However, the fund’s performance is somewhat dependent on management execution. While HIGH aims to deliver attractive risk-adjusted returns, you should be mindful of potential risks associated with the strategy, including the sporadic occurrence of small losses.
HIGH Vs JEPI
JEPI is an ETF that generates income through options, here’s a quick overview of how JEPI works:
JEPI generates income through a covered call options strategy, wherein it sells call options on its portfolio of equities. By collecting premiums from these options, JEPI enhances its overall income potential.
Unlike the Simplify Enhanced Income ETF (HIGH), JEPI focuses solely on covered call writing. This means that while both ETFs aim to generate income through options trading, JEPI’s strategy exclusively involves selling call options on its equity holdings, while HIGH employs a (potentially) more diversified approach, utilizing a combination of equity and fixed-income options spreads.
HIGH:
1. Expense Ratio: 0.51%
2. Assets Under Management: $418.56 million
3. Average Daily Volume: $6.58 million
4. Index Tracked: No Underlying Index
JEPI:
1. Expense Ratio: 0.35%
2. Assets Under Management: $33.36 billion
3. Average Daily Volume: $197.39 million
4. Index Tracked: No Underlying Index
The Simplify Enhanced Income ETF (HIGH) offers you a distinctive approach to income generation, combining short-term Treasury investments with an option spread writing strategy. With a focus on delivering attractive dividends and mitigating risks, HIGH presents an intriguing opportunity for investors seeking enhanced income in today’s market environment. However, prudent risk management and an understanding of the fund’s strategy are essential for investors considering this unique income-focused ETF.
