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.
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 criterias, 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?
- Attractive yield thanks to money earned issuing call options (10.38% as of August 31st);
- 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 youself intesreted on writing call options in the NASDAQ 100;
- Relatively low fees (0.35% total expense ratio).
- Poor performance. 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 inevestment;
Why covered call ETFs are popular?
Covered call ETFs are very popular with Canadian investors. Some of these ETFs managers have billions of dollars under management. Two reasons push investors towards covered call ETFs:
High dividend yield: thanks to the premiums earned when writing call options, the manager under certain conditions can earn premiums and enhance distributions;
Low volatility. Writing a call option is a conservative strategy aimed at reducing volatility;
Great for passive income: if you’re main objective is to achieve high dividend yields and build passive income, then covered call ETFs are a good option. But, remember the high dividend yield comes at a price which very low growth potential.
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:
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).
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.
JEPQ ETF Performance and Dividend yield
15.89% Dividend yield (as of January 4th Yahoo finance)
JEPQ Dividend Schedule
JEPQ ETF Holdings
|Security Description||% of |
|APPLE INC COMMON STOCK||10.21%|
|MICROSOFT CORP COMMON||8.61%|
|ALPHABET INC COMMON||6.4%|
|AMAZON.COM INC COMMON||5.83%|
|TESLA INC COMMON STOCK||3.52%|
|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%|