META - 10%+ Monthly Yields: JEPI Or JEPQ?

2023-09-06 08:05:00 ET

Summary

• High yield ETFs like JEPI and JEPQ are popular among passive income investors for their simplicity and attractive income streams.
• Moreover, JEPI and JEPQ offer considerable exposure to technology.
• We compare them side by side and offer our take on which is the better pick for passive income investors.

High yield ETFs are popular among passive income investors because they remove the need for time-consuming and highly challenging individual stock analysis, portfolio monitoring, and portfolio management. Instead, with a single click of the mouse, a passive income investor can get a well-diversified and attractive income stream while saving the time and mental energy needed to fully enjoy life's other pursuits.

As a result, both the JPMorgan Equity Premium Income ETF ( JEPI ) and the JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ) are popular with passive income investors because - in addition to the aforementioned benefits of ETFs - they offer:

• Their distributions are paid out on a monthly basis
• Both offer attractive 10%+ yields

In this article, we will compare JEPI and JEPQ side by side and share our view on which is the better option for passive income investors.

JEPI Stock Vs. JEPQ Stock: Total Return Track Record

While past performance is no guarantee of future returns, it can still be somewhat informative as to the merits of the strategy and management behind a fund. Here is how JEPI's and JEPQ's track records stack up against each other:

While JEPQ's total returns have significantly outperformed JEPI's over the period that both have been publicly traded, it is important to observe two facts to keep this performance in its proper context:

1. The performance period is very short (less than two years)
2. JEPQ's portfolio is dominated by technology stock holdings and - prior to the A.I. driven technology stock boom of 2023, JEPI was significantly outperforming JEPQ.

As you can see in the chart below, the Nasdaq ( QQQ ) - which JEPQ is based on - has significantly outperformed JEPQ since JEPQ launched less than two years ago. Moreover, prior to 2023, JEPQ had significantly outperformed QQQ during the tech sell-off:

Meanwhile, JEPI has performed roughly on par with the S&P 500 ( SPY ) over that same period of time, albeit with less volatility, thanks in large part to its covered call strategy.

As a result, it is difficult to come to any clear conclusions about long-term total return superiority between these two funds other than to presume that if one thinks that technology stocks will outperform over the long-term, then JEPQ is probably better, whereas if someone favors SPY over QQQ, then JEPI is probably a better investment.

JEPI Stock Vs. JEPQ Stock: Dividend Growth Track Record

When it comes to dividend growth, JEPI and JEPQ are relatively unreliable vehicles on a month-to-month basis. This is because they generate the vast majority of their distributable cash flow from options premiums, which can fluctuate month to month based on implied volatility in options pricing:

As a result, investors who use them as passive income vehicles to fund living expenses should plan accordingly and perhaps conservative assumptions about future distribution levels would be prudent.

Moreover, while these funds have generated positive total returns over the course of their trading lives, JEPI has only delivered minor capital appreciation and JEPQ has actually yet to return to even:

As a result, investors who spend all of their distributions on living expenses should not count on the underlying share prices to appreciate meaningfully - if at all - over the long-term and may want to conservatively assume that these vehicles are somewhat like annuities in the sense that their underlying principle will possibly decay over time.

In contrast to dividend growth powerhouses like the Schwab US Dividend Equity ETF ( SCHD ) which have generated exceptional double-digit dividend growth along with substantial capital gains over the long-term, JEPI and JEPQ are nearly purely current income instruments which will likely deliver only minimal long-term capital appreciation and dividend growth, if any.

JEPI Stock Vs. JEPQ Stock: Dividend Yield

As was already discussed, JEPI's and JEPQ's dividend yields are a bit unpredictable given the changes in month-to-month implied volatility which in turn impact the options premiums being generated by these funds as part of their covered call strategies. That being said, both funds do generate substantial cash flow from their underlying strategies which has thus far worked out to generating a double digit annualized distribution yield for shareholders.

On a trailing twelve month basis, JEPI has delivered a 9.66% yield on current cost to shareholders while JEPQ has delivered an 11.40% yield on current cost to shareholders.

JEPI Stock Vs. JEPQ Stock: Portfolio Composition

As the graphics below illustrate, while JEPI itself has substantial technology exposure (its largest sector by exposure at 17.65%), JEPQ is nearly 50% allotted to technology at 49.62%. Beyond that, JEPQ also is significantly invested in the communications sector (15.39%) in contrast to JEPI having much smaller exposure of just 5.30%. Moreover, JEPQ also has meaningfully more exposure to consumer cyclical stocks (14.21%) than JEPI does (8.98%).

Meanwhile, JEPI has a more balanced overall portfolio exposure profile, with significant exposure to health care (13.78%), industrials (13.67%), consumer defensive (13.06%), and financials (12.40%), giving it a less volatile performance profile and lower risks overall.

Finally, it is worth noting that both portfolios have considerable exposure (~15-17%) to corporate bonds and cash.

When it comes to number of individual holdings, JEPI once again proves itself to be better diversified with 139 holdings in contrast to JEPQ's 90 holdings.

When looking at their top 10 positions, we see that JEPQ is significantly more concentrated than JEPI is, further accentuating the fact that JEPI offers investors a better diversified portfolio. While JEPI only has 15.25% of its portfolio allocated to its top 10 holdings, JEPQ has a whopping 46.60% of its portfolio allocated in its top 10 holdings. In particular, JEPQ is heavily invested in tech mega caps such as Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOG )( GOOGL ), Amazon ( AMZN ), NVIDIA ( NVDA ), and Meta ( META ) which combine to make up ~34% of its overall portfolio. Meanwhile, JEPI's bets are very well spread out, with its largest position - AMZN - only making up 1.70% of its overall portfolio.

This heavy allocation to mega cap tech stocks - all of whom are making a major foray into artificial intelligence - also helps to explain the very strong year-to-date performance of JEPQ.

Investor Takeaway

Both JEPI and JEPQ offer investors very high monthly distributions, making them very appealing at first glance to passive income investors who are looking to generate lucrative income from a diversified portfolio without having to do any heavy lifting of their own.

Moreover, they both charge reasonable 0.35% expense ratios, meaning that investors get to keep the vast majority of their returns on investment.

Third, the covered call strategies implemented by these funds give them a less volatile total return profile than many other equity ETFs.

Fourth, these ETFs both have considerable exposure to technology stocks, which is a nice bonus given that technology stocks and income investments rarely end up in the same sentence.

That being said, investors should keep in mind that the high payouts - mostly funded with options premiums - will eat considerably into capital appreciation and may lead to the fund's principal eroding or at least largely stagnating over the long-term.

Additionally, investors in JEPQ in particular should keep in mind that this fund is not much more than a repackaged highly concentrated bet on the major mega cap technology stocks with covered calls being sold against them. As a result, they should feel highly confident in the risk-reward proposition being offered by these companies before taking the plunge into this fund.

In contrast, JEPI has much better diversification in its portfolio, resulting in a lower long-term risk profile. As a result, while we do not own either of these funds, if we were to pick one of them, we would prefer JEPI.

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