JEPQ (JPMorgan Nasdaq Equity Premium Income ETF) is a high dividend yield ETF. It focuses on providing investors with a monthly income stream using covered call strategies. These strategies enhance yield by collecting premiums on call options.
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In terms of the fund’s holdings, the manager invests in large cap Teck stocks that are part of the NASDAQ. Using a proprietary selection criteria, the manager would select companies with the highest prospects for growth seeking the highest adjusted return possible (low volatility combined with high returns).
Covered call ETFs such as JEPQ tend to deliver impressive dividend yields, well above regular dividend ETFs. However, this comes with a twist. The covered call strategy is a conservative strategy that limits potential capital gains.
Is JEPQ a good investment?
Owning the JEPQ ETF presents several advantages. Firstly, it offers an attractive yield, primarily through the money earned from issuing call options. This strategy can lead to lower volatility compared to investing directly in a NASDAQ 100 ETF like QQQ, making it suitable for conservative investors and those seeking regular income. Furthermore, periods of high volatility can increase the premiums earned by the fund, enhancing its potential returns. For individuals interested in options strategies but lacking the time or expertise to write call options themselves, JEPQ provides a convenient solution. Lastly, the ETF is cost-effective with a relatively low total expense ratio of 0.35%, adding to its appeal for cost-conscious investors.
Positives
- Attractive yield thanks to money earned issuing call options;
- Lower volatility than investing in a NASDAQ 100 ETF such as QQQ;
- Suits conservative investors and income seekers;
- High volatility usually increases the premiums earned by the fund;
- Saves you time and effort (if you were yourself interested on writing call options in the NASDAQ 100;
- Relatively low fees (0.35% total expense ratio).
Negatives
- Poor performance (compared to the index in bull markets). You are essentially giving up on the upside potentiel of the NASDAQ 100;
- The strategy of covered calls becomes ineffective in an unpredictable market;
- JEPQ is dominated by Tech firms so it’s far from being a diversified investment;
Why covered call ETFs are popular?
Covered call ETFs have become highly popular among Canadian investors, with some managing billions of dollars. This popularity stems from three main advantages. First, these ETFs offer a high dividend yield. Fund managers earn premiums by writing call options, which can be used to enhance distributions, providing investors with a higher yield. Second, covered call ETFs are known for their low volatility.
Writing call options is a conservative strategy aimed at reducing the overall risk and volatility of the investment, making these ETFs a more stable choice. Third, they are excellent for generating passive income. For investors whose primary objective is to achieve high dividend yields and build a steady stream of passive income, covered call ETFs present a compelling option. However, it’s important to note that this high yield often comes at the expense of growth potential.
By writing call options, the upside potential of the underlying stocks is limited, leading to lower capital appreciation over time. Despite this trade-off, the combination of high income, reduced volatility, and conservative risk profile makes covered call ETFs an attractive choice for many Canadian investors looking for stable and predictable returns.
JEPQ ETF Performance and Dividend yield
11.68% Trailing Dividend yield (as per Yahoo finance)
1 Month | 3 Months | YTD | 1 Year | |
Total return | -2.41% | 5.79% | 12.62% | 19.79% |
JEPI vs JEPQ
Feature | JEPI | JEPQ |
---|---|---|
Focus | Call options on S&P 500 | Call options on NASDAQ 100 |
Yield | Attractive | Attractive |
Volatility | Lower compared to S&P 500 ETF (SPY) | Lower compared to NASDAQ 100 ETF (QQQ) |
Ideal for | Conservative investors, income seekers | Conservative investors, income seekers |
Performance in Bull Markets | Underperforms S&P 500 due to call option strategy | Underperforms NASDAQ 100 due to call option strategy |
Fees | 0.35% total expense ratio | Not specified |
Diversification | Across various sectors | Limited, heavy concentration in tech firms |
Risk | Lower due to diversification | Higher due to lack of diversification |
Additional Benefit | Saves time and effort of writing call options on S&P 500 | Similar benefit for NASDAQ 100 optio |
Conclusion
Ultimately, whether JEPI or JEPQ is a good investment depends on individual investor preferences, risk tolerance, and market outlook. JEPI’s lower volatility and diversification across sectors could be attractive to those seeking stability and income, while JEPQ’s focus on the NASDAQ 100 may appeal to tech-focused investors. It is crucial for investors to conduct thorough research, consider their financial goals, and consult with a financial advisor to make informed investment decisions.
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Expected investment outcome with covered call ETFs
In a robust bull market, where the price of the underlying stock rises above the strike price plus the option premium, the covered call writer will underperform.
Due to earning the option premium, the covered call writer can normally anticipate to outperform merely holding the stock in flat, decreasing, and mildly rising markets.
Covered call strategy | |
Bull Market | lags in terms of performance |
Modest Bull Market | Outperforms the index |
Volatile market (frequent ups and downs) | Outperforms the index |
Beat market | Outperforms the index |
JEPQ Dividend Schedule
Monthly
Amount | Ex-Div Date | Record Date | Pay Date | Declare Date |
---|---|---|---|---|
0.3668 | 7/3/2023 | 7/5/2023 | 7/7/2023 | 12/30/2022 |
0.3566 | 6/1/2023 | 6/2/2023 | 6/6/2023 | 5/31/2023 |
0.4841 | 5/1/2023 | 5/2/2023 | 5/4/2023 | 12/30/2022 |
0.4539 | 4/3/2023 | 4/4/2023 | 4/6/2023 | 12/30/2022 |
0.4330 | 3/1/2023 | 3/2/2023 | 3/6/2023 | 12/30/2022 |
0.4406 | 2/1/2023 | 2/2/2023 | 2/6/2023 | 12/30/2022 |
JEPQ ETF Holdings
Security Description | % of Net Assets |
APPLE INC COMMON STOCK | 10.21% |
MICROSOFT CORP COMMON | 8.61% |
ALPHABET INC COMMON | 6.4% |
AMAZON.COM INC COMMON | 5.83% |
NDX_10 | 4.25% |
NDX_8 | 3.91% |
TESLA INC COMMON STOCK | 3.52% |
NDX_6 | 2.83% |
NDX_9 | 2.72% |
NDX_7 | 2.61% |
META PLATFORMS INC | 2.48% |
NVIDIA CORP COMMON STOCK | 1.86% |
CISCO SYSTEMS INC COMMON | 1.6% |
ADVANCED MICRO DEVICES | 1.46% |
COMCAST CORP COMMON | 1.28% |
INTUIT INC COMMON STOCK | 1.26% |
COSTCO WHOLESALE CORP | 1.22% |
QUALCOMM INC COMMON | 1.17% |
PAYPAL HOLDINGS INC | 1.15% |
Practice example: covered call strategy
An investor has 100 shares of Company A in his portfolio. Company A’s share is worth $ 30. He anticipates a stagnation or a slight drop in its price and he is ready to sell them at the price of 26 $. He decides to sell a call with the following characteristics:
• Exercise price: $ 26; Maturity: April; Option price: $ 4; Quantity: 100
He collects the following amount: 4 x 100 or 400 $ (premium)
Two cases should be distinguished:
CASE 1
Company A’s share price rose above the breakeven point of $ 30.
Break-even point = exercise price + premium = 26 + 4 = 30
The buyer of the option will choose to exercise his right to buy and, as the seller of the call, the seller will have to sell the shares at the strike price.
During this operation:
- the seller sold his shares for $ 26, which constitutes an acceptable loss for him.
- the seller collected the amount of the premium of $ 4, which helped boost the performance of his investments (yield).
CASE 2
Company A’s share price has fallen below the breakeven point of $ 30.
The buyer of the option will choose not to exercise his right to buy and the seller will not have to sell his shares.
Thanks to this operation, the seller keeps his shares in the portfolio and he collected the amount of the premium which generated an additional return.