Forget JEPI – Buy ICAP Today For Big Income (NYSEARCA:ICAP)

Co-produced with Treading Softly

It’s famously said that history moves in cycles – so does fashion apparently.

Yet the older I get, sometimes I see a famous quote attributed to P.T. Barnum saying being equally true:

There’s a sucker born every minute.

While no evidence exists that he actually said that phrase, it’s been tied to him for decades.

Why is that? Often scams, schemes, and tricks are able to be repeated again and again on various generations as they haven’t been exposed to them before.

One area that can often trip up new retirees and young investors is the allure of a high yield. We wrongly see the phrase “high yield equals high risk” tossed around like it’s factually true – when it isn’t.

However, just because that statement isn’t always true, it’s still exceptionally important to examine how or why a yield exists and if it’s truly sustainable for the long run.

I’ve run High Dividend Opportunities for more than six years now, focusing on identifying high-yield investments that provide investors with a sustainable income. Unsurprisingly, people frequently ask us about the latest vogue double-digit yielder, and we wanted to share our thoughts.

Let’s dive in!

The Greatest ETF?

You’ve seen us talk about Virtus InfraCap U.S. Preferred Stock ETF (PFFA) as a great ETF option for investors looking to add exposure to preferred equity, but want to enjoy the benefits of high liquidity. PFFA differentiates itself from peers by using leverage and being actively managed. These two factors have led PFFA to outperform traditional ETF peers like PFF significantly.

Today, I want to talk about another ETF from the same management team. InfraCap Equity Income Fund ETF (NYSEARCA:ICAP) has the same two key features. It’s actively managed, and it utilizes modest leverage.

ICAP invests in dividend-paying value stocks, with a portfolio that’s approximately 80% common equities and 20% in preferred equity. Looking at ICAP’s top 10, there are several current or former HDO picks. Source

By sector, ICAP is overweight Financials and Real Estate, while Information Technology and Consumer Discretionary are their lowest exposures.

A Comparison of ICAP and JEPI

In recent weeks, we’ve been getting a lot of questions about JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI). An ETF that has gotten a lot of attention because it has a high yield and outperformed the S&P 500 last year.

JEPI relies on generating income from covered calls and Equity Linked Notes or ELNs. These notes provide a fixed return plus a portion of the upside for the underlying equity. This limits the downside risk, but it also limits the upside.

In a declining market, you can expect ELNs to outperform equities as they pay the minimum. However, if the market is going up, this strategy will underperform.

So in 2022, when the S&P was down over 18%, it isn’t a surprise that JEPI outperformed the S&P and outperformed ICAP.

Note that JEPI outperformed the most in the months with the steepest sell-offs in the market. Investors look at this, and also the trailing dividends, which add up to 11%-plus yield, and they get excited. High yield and protected downside!

They forget two important factors:

• The dividends are not stable. JEPI’s dividend changes every month. JEPI’s strategy will produce higher dividends when volatility is high. Projecting forward, the current dividend is only meaningful if you expect the market to fall as aggressively in 2023 as it did in 2022. Realistically, investors should expect a dividend in the 5-8% yield range.
• JEPI’s strategy protects downside risk but gives up the benefits of the upside. When the market rallies, JEPI will only contribute a small portion of that upside. Look at what has happened year-to-date:

When you look at the big picture, yes, JEPI is less volatile than ICAP. However, ICAP isn’t surrendering as much upside. When the market rallies with strength, ICAP catches up very fast.

The market goes up more frequently than it goes down, that’s why we invest in it in the first place. A strategy like JEPI’s shines when the market is going down and is volatile. It lags significantly when the market is going up as it did in 2021:

ICAP does use out-of-the-money covered calls, but utilizes this strategy on approximately 30% of its portfolio, with an average expiration three weeks out. Combining this restrained strategy with leverage allows ICAP to participate more aggressively in the upside of the market, while still providing income.

ICAP generates its dividend income from three sources.

1. Preferred Equity
2. Common equities that pay dividends
3. Out of the money-covered calls

With multiple sources of income, ICAP can provide a stable dividend, which it just increased to $0.18/month.

This makes ICAP a good option for investors looking to get broad exposure to value stocks.

Conclusion

We prefer ICAP over JEPI much like we prefer PFFA over PFF, why? We see it as a route for sustainable long-term income. JEPI deploys a method that works well when the market is trending downward slowly, but history tells us that when a covered call options ETF falls in value, it rarely recovers.

So what happens? The managing firm, in this case, JPMorgan Chase, will wrap up the ETF and mint a fresh new one with a clean record that will attract millions of new retail investors – ones not burned by the last one.

We’d rather not be holding the bag when the dance comes to an end. So we choose to invest in ICAP instead, which will provide us income – still high yield! – but in a sustainable growing methodology.

That’s the focus of our Income Method, income over the long haul, repeatable, and reliable.