JEPQ ETF

Review JEPQ: JPMorgan Nasdaq Equity Premium Income ETF

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.

This post is available in video format!

cibc investors' edge

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
YTD1 Year
Total return-2.41%5.79%12.62%19.79%
JEPQ ETF as of August 8th 2024 Yahoo finance

cibc investors' edge

JEPI vs JEPQ

FeatureJEPIJEPQ
FocusCall options on S&P 500Call options on NASDAQ 100
YieldAttractiveAttractive
VolatilityLower compared to S&P 500 ETF (SPY)Lower compared to NASDAQ 100 ETF (QQQ)
Ideal forConservative investors, income seekersConservative investors, income seekers
Performance in Bull MarketsUnderperforms S&P 500 due to call option strategyUnderperforms NASDAQ 100 due to call option strategy
Fees0.35% total expense ratioNot specified
DiversificationAcross various sectorsLimited, heavy concentration in tech firms
RiskLower due to diversificationHigher due to lack of diversification
Additional BenefitSaves time and effort of writing call options on S&P 500Similar 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.

Video

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 Marketlags in terms of
performance
Modest Bull MarketOutperforms the index
Volatile market
(frequent ups and downs)
Outperforms the index
Beat marketOutperforms the index

JEPQ Dividend Schedule

Monthly

AmountEx-Div
Date
Record
Date
Pay
Date
Declare
Date
0.36687/3/20237/5/20237/7/202312/30/2022
0.35666/1/20236/2/20236/6/20235/31/2023
0.48415/1/20235/2/20235/4/202312/30/2022
0.45394/3/20234/4/20234/6/202312/30/2022
0.43303/1/20233/2/20233/6/202312/30/2022
0.44062/1/20232/2/20232/6/202312/30/2022

JEPQ ETF Holdings

Security Description% of
Net Assets
APPLE INC COMMON STOCK10.21%
MICROSOFT CORP COMMON8.61%
ALPHABET INC COMMON6.4%
AMAZON.COM INC COMMON5.83%
NDX_104.25%
NDX_83.91%
TESLA INC COMMON STOCK3.52%
NDX_62.83%
NDX_92.72%
NDX_72.61%
META PLATFORMS INC2.48%
NVIDIA CORP COMMON STOCK1.86%
CISCO SYSTEMS INC COMMON1.6%
ADVANCED MICRO DEVICES1.46%
COMCAST CORP COMMON1.28%
INTUIT INC COMMON STOCK1.26%
COSTCO WHOLESALE CORP1.22%
QUALCOMM INC COMMON1.17%
PAYPAL HOLDINGS INC1.15%

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.