Investing in This High-Yield ETF Could Turn $500 Per Month Into $42,650 in Annual Passive Income | The Motley Fool (2024)

What's the best way to ensure you have ample income during your later years? Plan ahead. If you start planning (and investing) early enough, your chances of enjoying a comfortable retirement increase dramatically.

The JPMorgan Equity Premium Income ETF (JEPI -0.27%) could be a great part of the financial planning for many people. Why? Investing in this high-yield exchange-traded fund (ETF) could turn $500 per month into roughly $42,650 in annual passive income.

What you need to know about this high-yield ETF

You can figure out a lot about this ETF from its name alone. The fund is managed by JPMorgan Chase, one of the largest financial services companies in the world. It invests in equities (stocks) and equity derivatives (options). The ETF's primary objective is to provide monthly income with limited volatility.

What the ETF's name doesn't tell you is how it attempts to achieve its objective. JEPI's managers use a proprietary model to evaluate a wide range of stocks. They also write out-of-the-money S&P 500 call options to supplement the income from these stocks.

The ETF currently has 135 holdings with no stock making up more than 1.75% of the total portfolio. Its top positions include Trane Technologies, Amazon, Progressive, Microsoft, and Intuit. However, the lineup changes frequently: The fund's turnover ratio is 190%.

Income investors will probably love JEPI's 30-day SEC yield of 6.98%. Its 12-month rolling dividend yield is an even higher 8.5%. The fund's annual expense ratio is 0.35%, higher than most index ETFs but still very competitive with actively managed funds.

How it could be a passive income machine

Let's delve into how investing in this ETF could turn $500 per month into annual passive income of $42,650. There are three assumptions made to arrive at this income figure.

First, the calculation assumes JEPI achieves an average annual total return that matches its current 30-day SEC yield of 6.98%. In other words, we're projecting the ETF's price won't move higher or lower. JEPI has delivered an average annual return of 13.33% since its inception in May 2020. However, I don't expect it will be able to generate such a lofty return over the long run.

Second, I've assumed that JEPI will still be able to pay a dividend yield of 6.98% or more in the future. Although its monthly dividend fluctuates, I think this level of yield is attainable.

Third, the calculation assumes that you invest $500 per month for 30 years. Yes, that's a long time. However, investing this amount regularly for 30 years isn't unrealistic for many Americans.

Investing $500 per month for 30 years with an annual return of 6.98% would grow your portfolio to a little over $611,108. With a yield of 6.98%, this total would generate an annual income of roughly $42,655.

A few caveats

Any assumption could prove to be wrong. JEPI might not be able to deliver an average annual total return of 6.98% or continue paying yields that high.

Investment companies shut down ETFs from time to time. It's possible JPMorgan Chase could close JEPI at some point in the future before your money could grow enough to pay the level of passive income discussed.

Finally, don't forget about inflation. It's a near certainty that $42,650 won't have the same buying power 30 years from now that it does today.

Still, all of these issues can be factors with any ETF. The JPMorgan Equity Premium Income ETF could very well be a passive income machine for many investors who plan ahead.