Paperjam interviewed Hamilton Reiner, portfolio manager of the world’s largest active ETF, JPMorgan’s Equity Premium Income Fund (JEPI), during his April 2026 European tour promoting an Irish-based Ucits version of the strategy. “It's the same exact thing, same people, same process and philosophy and same holdings,” he said. He added that “derivative income” strategies remain niche but are gaining traction.

Strategy inspired by risk-averse farmers

The strategy is built on a philosophy of providing asymmetric returns, capturing a portion of market upside while mitigating downside risk. This approach is compared to century-old practices used by farmers to hedge crops and lock in prices. For example, a farmer fearing adverse weather such as drought or excessive rain would hedge their crop, thereby buying downside protection.

Farmers face uncertainty over future prices when deciding what to plant. By locking in a price (e.g., €40 per bushel) above their €20 cost, they secure a profit and reduce risk. If prices rise, they miss upside; if prices fall, they are protected—illustrating the trade-off of hedging.

Similarly, JPM AM’s $45bn active ETF is designed to provide investors with consistent “high income, lower volatility, and attractive risk-adjusted returns,” said Reiner. “This is a 60/40 strategy without the 40 or said differently, a balanced strategy without the bonds.”

Multi-dimension risk reduction

This philosophy translates into a structured options-based strategy named “Hedged Equity Laddered Over (HELO).” The fund holds a defensive portfolio of S&P 500 stocks while systematically selling one-month call options on the index. It retains limited participation in potential upside by using slightly out-of-the-money calls. The structure also offers daily transparency and liquidity, while excluding leverage.

Risk reduction applies also at the stock selection level. Unlike passive players, JEPI does not own the entire index. “It focuses on ‘high-quality names with lower earnings variability’ and limits concentration risk,” argued Reiner. JEPI caps individual holdings at approximately 2.5% and limits technology sector exposure to around 20% to avoid overexposure to the Magnificent 7.  

Consequently, Reiner noted that JEPI typically operates with 35% to 40% less risk or beta (a measure of market sensitivity) than the S&P 500, while its Nasdaq-orientated portfolio (JEPQ) has approximately 25% less risk than the index.

Upside and downside dynamics

The strategy comes at a cost: upside may be capped during sharp rallies, as part of the potential gains is exchanged for immediate income from options premiums. The trade-off was particularly stark in 2024 and 2025 when the fund underperformed the S&P 500 and its peers (see Chart 1).

In down markets, however, these strategies can offer meaningful protection—for instance, in 2022, when the S&P 500 and income derivative peers fell 18% and 10.2%, JEPI declined by only 3.5%. Reiner initially expected their ETF to decline similarly to its peers at -10% to 12%.

When the VIX rises, the options overlay generates more income, potentially boosting distributions during market stress—as illustrated by JEPQ delivering close to 12% income in such environments. Conversely, low volatility can weigh on income generation. For example, in 2017 the VIX fell below 10 roughly 20% of the time.

Reiner argued that investor behaviour is key: “My happy spot is when people will continue to own stocks irrespective of what’s going on in the world.” He added that investors stayed invested in the fund in April 2025, after Liberation Day. “That's priceless to overall portfolios, because having the ability to be protected downside means you never have to sell out.”

Morningstar flags limits of the strategy

Morningstar provided a different perspective. “In general, covered-call funds have not been the best buy-and-hold investments for investors with a longer time horizon,” wrote Lan Anh Tran, analyst at the agency, in her review of the fund.

JEPI holds a 3-star rating from Morningstar, alongside ‘above average’ assessments for people, process, and parent. These factors, combined with its relatively low fee and long-term potential, recently contributed to an upgrade to a Gold Morningstar Medallist Rating.

Benchmarking: a complex exercise

JEPI targets S&P 500 stocks while generating income levels comparable to emerging market bond funds—raising the question: which benchmark is appropriate?

Neither. Reiner considers traditional benchmarks like the S&P 500 as “imperfect” for these strategies because they do not account for the significantly lower risk budgets. Zachary Evens, analyst at Morningstar, concurred: “JEPI delivers high income and modest drawdown reduction, while the S&P 500 index is pure large-cap US stock exposure.” He added: "Two very different investments with different objectives.”

Morningstar created a specific “Derivative Income” peer category that consists of a wide variety of strategies that sell options to generate income to better evaluate these products. “Funds like JEPI should be compared against its closest peers in the category and against what the strategy says it does. JEPI fares well in both of those tests,” wrote Evens. The agency calculated that the annual performance over 5 years until 27 April 2026 reached 8.17%, in line with peers at 8.03% (see chart 2).

Reiner emphasised evaluating the funds based on beta and risk-adjusted returns (Sharpe ratio), and up/down capture rather than pure absolute performance. Over five years, the Sharpe ratio of the JEPI ETF stood at 0.50 compared to 0.57 for the S&P 500, as of 31 March 2026.

In other words, JEPI’s lower volatility (10.13 vs. 15.26) was not sufficient to compensate for its lower annual return (8.38% vs. 11.58% for the S&P 500).

Implementation and tax considerations

Reiner stressed the ability of the fund to generate elevated distribution. “Dividend-orientated European investors love income,” he said. JPM AM expects monthly income of approximately 1%–3% from dividends and 6%–9% from option premiums, targeting total distributable income of 7%–9% for S&P 500 strategies and 9%–11% for Nasdaq-orientated portfolios.

Yet Tran argued that the strategy “isn’t tax efficient” in her fund analysis focused on US investors. The approach of the fund “precludes it from taking advantage of lower long-term capital gains tax rates,” she added. She also stressed that “there may be more tax-efficient options available, such as selling investments with long-term capital gains.”

As these strategies expand into Europe via Ucits vehicles, tax efficiency is a priority for investors. The strategy based on the S&P 500 will offer distribution and accumulation share classes. JPM AM simply stated that taxation will be different for both share classes.

According to the asset manager, “any dividends paid by the ETFs mentioned do not suffer Irish withholding taxes and are taxed as investment income in Luxembourg (similar to any other Luxembourg SICAVs (UCITS)). Capital gains are taxed depending on the holding period of the Luxembourg individual investor (e.g. exempt after 6 months holding).”

Conclusion

As derivative income strategies expand in Europe, their appeal lies in offering a middle ground—equity exposure with built-in income and downside mitigation, albeit at the cost of capped upside, particularly in strong bull markets.