CCOR Vs. JEPI: Trading Income And Some Return For Much Less Risk

(This article was co-produced with Hoya Capital Real Estate.)

Introduction

The JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) is an exchange-traded fund (“ETF”) that is reviewed often by numerous Seeking Alpha contributors. Thru its use of Equity-Linked-Notes, it provides investors with equity exposure and a superior level of income compared to straight equity ETFs. I just discovered the Cambria Core Equity ETF (NYSEARCA:CCOR) when it was mentioned in a comment in a recent article of mine. After a quick look at CCOR, I saw two traits investors like if comparing to an ETF like SPDR S&P 500 ETF (SPY) or the JEPI ETF:

• A smoother ride, especially if retired where recovery time is more limited.
• Gaining point #1 without giving up too much in return.

Investors needing cash flow might add this point: not losing too much income.

Core Alternative ETF review

Seeking Alpha describes this ETF as:

The fund invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to create its portfolio. The fund invests in growth and value stocks of companies across diversified market capitalization. The fund employs proprietary research to create its portfolio that seeks capital appreciation and capital preservation with a low correlation to the broader U.S. equity market. Benchmark: S&P 500 TR USD. CCOR started in 2017.

CCOR has $570m in assets under management (“AUM”) and comes with 107bps in fees. Yield is not a priority for CCOR: 1.1%. The ETF managers, Pursell Management, go into more detail as to the strategy employed:

The Core Alternative ETF utilizes a combination of several strategies in aiming to produce capital appreciation while reducing risk exposure across market conditions. Under normal market conditions, at least 80% of the value of the Fund’s net assets will be invested in equity securities. The fund intends to invest the remaining value of its net assets in options where pricing provides favorable risk/reward models and where gains can be attained independent of the direction of the broader U.S. equity market. The Fund uses proprietary models and analysis of historical portfolio profit and loss information to identify favorable option trading opportunities, including favorable call and put option spreads.

Source: corealtfunds.com/fund

Being a new advisor to me, I found this about their investment philosophy:

Core Alternative Capital, LLC (“Core Alternative”, “Core Alt”, or the “Company”) is an investment adviser registered with the U.S. Securities and Exchange Commission that was formed in 2019. Core Alt is an independent investment advisory firm focused on non-traditional asset management and alternative investment strategies. The Company’s overall goal is to preserve and grow capital by producing positive absolute and risk-adjusted returns, while attempting to produce unique exogenous return streams which are uncorrelated to broad equity, fixed income, and alternative assets and strategies.

Source: corealtfunds.com/about

They also provided a chart outlining the ETF’s investment concept:

Within the same brochure, they listed this points on how this works:

• Equities managed to provide competitive long-term growth with focus on flight to quality and improved financial characteristics (value/growth).
• Options managed to provide risk mitigation, stability, and to profit through volatility in times of uncertainty.

The portfolio is 90-95% Large-Cap stocks, with these points highlighted:

• 40-60% high-quality stocks selected via proprietary filter and research process.
• Sector weightings conscious of S&P 500 Index with goal of reducing beta and compounding growth over time.
• Focus on dividend-growth stocks to create competitive income and attractive long-term characteristics.

The portfolio balance is in S&P 500 options or cash, with these purpose in mind:

• Options managed daily for risk migration and to profit during periods of increased volatility.
• Puts are actively adjusted to maintain minimum of 100% equity coverage.
• Repeatable and disciplined process keeps portfolio aligned within risk parameters.

CCOR holdings review

Since CCOR mentioned being conscious of S&P 500 Index sector weights, here is how the align: a big underweight in Tech stocks.

CCOR currently holds 41 stocks, with the Top 10 representing 29% of the assets. They also owned 10 options, 9 of which will be expired by the time this article publishes. CCOR noted they adjust option positions daily.

The SPX futures closed at 3842 on the last day traded before collecting this data. As all positions are Long, CCOP is the buyer, not the writer, unlike many ETFs that use option strategies.

CCOR distribution review

According to the ETF’s 8937 form, 3.04% of the 2021 dividends were ROC. The low yield and other characteristics earn CCOR a “B-” payout rating.

JPMorgan Equity Premium Income ETF review

Seeking Alpha describes this ETF as:

The fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the fund’s primary benchmark, the Standard & Poor’s 500 Total Return Index (S&P 500 Index) and (2) through equity-linked notes (ELNs), selling call options with exposure to the S&P 500 Index. Benchmark: S&P 500 TR USD. JEPI started in May 2020.

JEPI has $16.6B in AUM and sports a 35bps fee structure. Here, yield is an attribute; currently 11.3%. The manager adds this flavor to the above description:

JPMorgan Equity Premium Income ETF seeks to deliver monthly distributable income and equity market exposure with less volatility.

EXPERTISE

• Portfolio managers with over 60 years of combined experience investing in equities and equity derivatives.

PORTFOLIO

• Defensive equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings.
• Disciplined options overlay implements written out-of-the-money S&P 500 Index call options to generate distributable monthly income.

Source: am.jpmorgan.com JEPI

Holdings review

The unique holdings feature of JEPI is its use of Equity-Linked-Notes to enhance the income provided to investors, versus Covered Calls used by the other ETFs mentioned here. I pulled the following important points explaining ELNs from Investopedia.

• An equity-linked note, or ELN, is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are designed to return the initial investment plus a variable interest linked to the equity return.
• Equity-linked notes protect investor capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped. Even in the worst-case scenario, most equity-linked notes offer full principal protection.
• There is a chance that the options will expire worthless, in which case the investor gets back the $1,000 initially put in. If, however, the options appreciate in value with the S&P 500, those returns are added to the $1,000 that will eventually be returned to the investor.

JEPI holdings review

JEPI currently holds 128 assets, broken into these asset classes.

Seeking Alpha classifies the ELNs as Corporates in this table.

The Top 20, not counting the cash, are 25% of the portfolio.

JEPI holds 16 ELNs but no descriptions of them was provided, but here are the ELNs held at the end of the September to give reader an idea. To reduce default risk, the ELNs are issued by six different banks.

JEPI distribution review

This pattern has earned JEPI an “A+” score.

Comparing ETF results

I am going to do this twice to show how the results differ based on the data used. The first compares the two actual ETFs reviewed.

Over this time span since JEPI start, it has the better return but much higher StdDev: CCOR was a smoother ride. CCOR also would add more portfolio diversification with its 55% correlation factor versus JEPI’s 91%.

Because JEPI has short history and to demonstrate time matters, this time I use the JPMorgan Equity Premium Income Fund Class I (JEPIX) mutual fund, but first I will show how JEPI and JEPIX match up.

JEPIX’s CAGR is lower by the extra fees it charges; other than that, I believe it is useful for the next chart.

Here CCOR is still a smoother ride, but its CAGR is much closer. To me, what this shows is JEPI produces better results in strong markets, showing its ELN strategy is superior to the algorithm used by CCOR. For investors wanting income, CCOR’s results doesn’t warranted accepting the much lower yield.

Portfolio strategy

Need income, hold the JEPI ETF. Want stability; based on the longer history chart, CCOR could play a part in damping down an investor’s portfolio. The question then becomes, how well does CCOR do this compared to some other well covered funds discussed on Seeking Alpha? I picked out a few of those, plus some I use for this analysis. These include:

• • Amplify BlackSwan Growth & Treasury Core ETF (SWAN)
  • John Hancock Seaport Long/Short Fund Class I (JSFDX)
  • Merger Fund (MERFX)
  • iShares Core Conservative Allocation ETF (AOK)
  • Cambria Tail Risk ETF (TAIL)
  • Invesco S&P 500 Low Volatility ETF (SPLV)

By including SWAN, we do miss six months of CCOR history.

For investors looking for a low correlation ETF, CCOR is tops except for TAIL’s negative correlation, though that comes a negative CAGR. The MERFX fund has the lowest StdDev but the lowest positive return. CCOR has the best Sharpe ratio and its Sortino ratio is far better. SPLV has the highest CAGR, but despite its name, the worst StdDev. Based on this initial search, CCOR is worth considering for investors looking for stability and have other sources of income. I would rate it a Buy for those investors.

RMD strategy

Both ETFs can play an important part for investors with accounts requiring RMDs to be taken. Having to sell in a down market, either stocks or bonds, is never fun nor good long-term as the funds are not there to recover when the markets rebound. An ETF like JEPI can generate the income necessary to cover all/part of the RMD without having to touch the assets. An ETF like CCOR, which is more stable than most ETFs still providing a decent return, could be held in amounts that would cover 2-3 years of RMDs and sold to make up what cash shortage there is to meet that year’s RMD and then rebalance the account on the investor’s time table.

Final thoughts

As reader can tell and knew already, the “best” investment depends on what goal or goals that person wants or needs. Both of the ETFs reviewed here are good at what they provide investors but are best geared to different goal needs.

Since I mentioned CCOR versus SPY, I should cover that comparison. Investors give up about 600bps in return for 41% of SPY’s StdDev, resulting in CCOR having superior risk ratios and only 19% correlation. An allocation between the two heavily weighted toward CCOR has the best risk ratios.

After little coverage of CCOR, Modern Income Investor posted this a few days ago: CCOR: Strong Buy Rating, Based On Its Unique Risk-Management Approach. The article adds to mine and worth the read.