lovable losers? The WSJ on active ETFs

David_Snowball

There's a fascinating piece in the WSJ on the ascendance of active ETFs (Jon Sindreu, "Investment Industry Loses Active ETFs," 10/8/2024). Not quite sure what to say about it. Key points:

1. Passive is a low margin, commoditize business which is "killing many midsize asset managers that lack the scale of compete."

2. Smart beta was the industry's first attempt to raise its margins by offering passive-like (or "passive-light") ETFs with higher fees. That cascaded in ESG and other niche preferences.

3. Active ETFs "are the latest attempt" to add to margins, and their investors "are paying more to get less performance." In particular, large cap active ETFs trail both large cap funds and passive ETFs in performance. Active mid-caps trail passive mid-caps. None of those calculations take volatility into account.

4. Active ETF launches this year outnumber passive by 3:1.

5. Active ETFs are outperforming in small caps and bonds.

6. The largest active ETF is JPMorgan Equity Premium Income ETF, "which sells covered calls to reduce volatility," an activity that Mr. Sindreu describes as "a sure way to miss out on big gains during rallies while retaining unlimited downside risk."

To which I say, "hmmmm..."

yogibearbull

Credit the success of JEPI & JEPQ to JPM PR. There is much older GATEX that isn't hot.
Also, the public misunderstands these - that the upside is limited, but the downside is full. Moreover, the potential LT-CGs get changed into premium income.

bee

Different take on the successes of some active ETFs:

how-avantis-become-one-fastest-growing-fund-companies

hank

yogibearbull said:

Credit the success of JEPI & JEPQ to JPM PR. There is much older GATEX that isn't hot.
Also, the public misunderstands these - that the upside is limited, but the downside is full. Moreover, the potential LT-CGs get changed into premium income.

Typo? GATEX not an etf.

WABAC

TCAF, QLTY, and LCR go through boomlets of attention here from time to time. Sindreu wants to know if your yachts have arrived yet.

Makes me wonder how much ink Sindreu spilled on the topic of concentration in the cap-weighted S&P 500. Are we over that now?

WABAC

WABAC said:

TCAF, QLTY, and LCR go through boomlets of attention here from time to time. Sindreu wants to know if your yachts have arrived yet.

Makes me wonder how much ink Sindreu spilled on the topic of concentration in the cap-weighted S&P 500. Are we over that now?

that lack the scale of compete.

Did he just noun a verb? I don't think I've seen that yet.

yogibearbull

GATEX is an OEF with 12/1977 as inception. It has been using options overlays since soon after there were tradable options in 1970s. Its inception well predates the ETFs that have been around only since 1990s. So, GATEX isn't an ETF, but a granddaddy OEF that has been using these options overlays.

The point I was making was that JEPI & JEPQ don't use any new options techniques. But their AUMs have ballooned just because of JPM's marketing muscle & investors' misconceptions about these late bull market funds.

Most active ETFs just use options overlays, not so for active OEFs.

hank

OK - Thanks Yogi

d

I’m not into options. Owned GATEX for short periods in the past and felt it was a more conservative approach than some of the more popular / recent options strategies. But might be wrong.

sma3

JEPI has outperformed GATEX by a wide margin since JEPI inception. I assume this is because GATEX also buys puts, which have not helped during a bull market

mskursh

JEPI was advertised pretty heavy on Morningstar, Bloomberg, CNBC in 2021. and then 2022 happened which sent inflows to the moon on this thing. /investing on reddit had gobs of 20 somethings building JEPI/SCHD heavy portfolios which was interesting.

JEPI's stated benchmark is the sp500 but tries to match it with less volatility. it gets the volatility part right but for probably most of the dollars invested in this thing, its been a flop.

Hopefully people learn their lesson and build a portfolio with these products for the long term but thats not how it seems it goes. people will still pile into good performers and then sell when it doesn't go their way.

see ARKK.

Observant1

"Hopefully people learn their lesson and build a portfolio with these products for the long term but thats not how it seems it goes. people will still pile into good performers and then sell when it doesn't go their way."

'Twas ever thus.

Sven

One needs to pay attention on the expense ratio of active managed funds. There is a fine balance between accessibility (via brokerages) and cost of owning these active ETFs. Hopefully these active ETFs are equally as tax efficient as the passive ETFs.

Mark

@Observant1 +1

yogibearbull

I took another look at JEPI. While it hasn't been exposed to a bear market, 2022 and 2025YTD have been tough years. JEPI is consistently superior to OEF GATEX (that also uses protective puts) and equivalent allocation 65%SPY + 35%BND; note that Relative SD of JEPI is 0.65 wrt SP500.

For an individual stock, covered-call limits the upside in exchange for the call premium, but doesn't limit the downside. So, something in the fund structure of JEPI is leading to lower volatility. My guesses for reasons include (i) lower equity exposures, (ii) more conservative equity holdings, (iii) upside caps (that trim some volatility), (iv) execution of the options strategies & (v) redeployment of premium & other proceeds (e.g. when the stocks get called away). But I cannot point to a single dominant cause.

Similar observations can be made for JEPQ in relation to QQQ (Nasdaq 100).

https://testfol.io/?s=kRhewIHNMLw

Observant1

Barron's recently published a story about covered-call funds.
JEPI and JEPQ were both mentioned.

https://www.msn.com/en-us/money/topstocks/these-funds-offer-low-volatility-and-10-yields-there-s-a-trade-off/ar-AA1F6xo9

sma3

There was an analysis of JEPI last year ( in seeking alpha I think) that pointed out the covered calls are on the SP while it's equity exposure is quite different.

So it could be caught in a bind if it's stock picking bottoms out. I think it is too far out on that limb

yogibearbull

Barron's article simply mentioned that "...JEPI has about two-thirds the volatility of the market...", but didn't offer any explanation.

True, the equity portfolio of JEPI has more conservative, dividend-paying stocks. And Morningstar shows 86.49% equity exposure with the rest in Other (options on SP500 + some cash).

Assuming JEPI equity similar to VYM (3-yr Relative SD 0.8546 by TestFol) and applying M* % equity, I get to Relative SD 0.7391 for JEPI.

Repeating this calculation with VIG, I get 3-yr Relative SD 0.7289 for JEPI.

That is still too far from TestFol 3-yr Relative SD 0.6512 (almost 2/3 rd) for JEPI. So, I am missing something in JPM's secret sauce.

WABAC

JEPI gets the ink. DIVO get the job done, for me anyway.

yogibearbull

DIVO has a different covered-call strategy. It has a concentrated equity portfolio and writes calls only on a handful of holdings. JEPI on the other hand uses SP500 index for call-writing.

DIVO has a slightly higher volatility (Relative SD 0.6861) but also does little better.

WABAC

The nice thing about DIVO is that they aren't even required to use covered calls unless they see an advantage. That seems to me to be a more practical idea for an actively managed fund. Of course it does require the managers to be adept enough to identify opportunities.

Per the OP:

6. The largest active ETF is JPMorgan Equity Premium Income ETF, "which sells covered calls to reduce volatility," an activity that Mr. Sindreu describes as "a sure way to miss out on big gains during rallies while retaining unlimited downside risk."

YTD, JEPI is off -0.84, SPY is off -0.89, while DIVO is up 2.42.

Needless to say that there are other funds out there doing better than DIVO. I wonder how Sindreu's portfolio is doing.