TSLA - Billionaires Bearish On Magnificent 7: JEPI Or JEPQ For Massive Dividends?

2023-12-15 13:11:28 ET

Summary

• Several leading investors have recently expressed concern about the attractiveness of leading mega-cap technology stocks.
• We examine their concerns.
• We then compare JPMorgan Equity Premium Income ETF and JEPQ side-by-side with their concerns and other factors in mind to see which is the better buy for massive monthly dividends.

As we have discussed recently, prominent investors such as "Bond King" Jeffrey Gundlach and retired star mutual fund manager Peter Lynch have made comments in interviews that indicate that they believe that the "Magnificent Seven" stocks (namely, Apple Inc. ( AAPL ), Amazon.com, Inc. ( AMZN ), Alphabet Inc. ( GOOGL , GOOG ), Meta Platforms, Inc. ( META ), Microsoft Corporation ( MSFT ), NVIDIA Corporation ( NVDA ), and Tesla, Inc. ( TSLA )) are richly valued right now and that better investment prospects are to be found elsewhere. With this in mind, we are going to compare two leading ETFs that investors look to for massive monthly dividends - the JPMorgan Equity Premium Income ETF ( JEPI ) and the JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ) - and offer our take on which is the better buy today.

Jeffrey Gundlach's and Peter Lynch's Concerns About The "Magnificent Seven"

Mr. Gundlach, the CEO of DoubleLine Capital, raised concerns about how well these tech giants would hold up in a potential market downturn, given how well they have performed year-to-date during the recent AI-fueled market expansion:

As he stated recently :

They will obviously be the worst performers in the upcoming recession. Whatever is leading the charge going into the economic downturn invariably must lead the charge on the way down. I would get out of them.

Peter Lynch voiced similar concerns , pointing out the inflated valuations of these technology leaders. Despite their significant role in the recent gains of the S&P 500 ( SPY , VOO ), Lynch pointed out the overall underperformance of the rest of the market beyond these high-profile tech companies. In fact, many stocks are still below their 2018 values. As a result, Lynch recommends looking beyond the leading mega-cap tech stocks that have become so popular due to their strong performance this year to find value elsewhere.

Comparing JEPI And JEPQ

Both JEPI and JEPQ do not invest in many high-yield dividend stocks but rather support their large monthly dividends by selling covered calls. They then pay out the options premiums that they generate to shareholders as dividends. This approach to generating cash flow and paying out dividends means that their payments tend to be a bit lumpy from month-to-month and also implies that investors should not expect much in the way of long-term dividend growth:

They both also have identical 0.35% expense ratios, which is not as low as some funds, but not bad either for a fund that follows a more specialized strategy like covered calls. Moreover, their juicy monthly dividend payouts that over the past twelve months have sported annualized yields of 8.62% and 10.38% for JEPI and JEPQ, respectively, have attracted a rapidly growing investor base, as evidenced by their strong assets under management growth:

As for their differences, they ultimately derive from their underlying portfolios. JEPQ's strategy is ultimately benchmarked against the Magnificent Seven-heavy Invesco QQQ Trust ETF ( QQQ ), whereas JEPI is more diversified.

JEPI's diversified portfolio spans several sectors: technology (18.68%), healthcare (13.74%), industrials (13.69%), financials (12.72%), and consumer defensive (12.64%), among several others. JEPQ, conversely, has the majority of its portfolio invested in technology stocks (50.85%), with some exposure to communications (15.01%) and consumer cyclical (14.13%) stocks, followed by much lower exposure to sectors such as healthcare (6.86%), consumer defensive (6.36%), and industrials (4.08%).

Both JEPI (15.17%) and JEPQ (16.17%) also hold a substantial amount of corporate bonds and cash in their portfolios. Finally, JEPI has broader diversification in its portfolio with 133 total holdings, compared to JEPQ's 93.

When it comes to their top 10 holdings, JEPI is well diversified, with only 16.04% of its total portfolio invested across the following securities:

1. JPMorgan US Govt Mmkt Fund IM Shares (Restricted) - 1.72%.
2. Adobe Inc. ( ADBE ) - 1.70%.
3. Microsoft Corp - 1.67%.
4. Amazon.com Inc - 1.65%.
5. The Progressive Corporation ( PGR ) - 1.62%.
6. Trane Technologies plc Class A ( TT ) - 1.59%.
7. Intuit Inc. ( INTU ) - 1.58%.
8. Mastercard Incorporated Class A ( MA ) - 1.53%.
9. Accenture plc Class A ( ACN ) - 1.52%.
10. Visa Inc. Class A ( V ) - 1.48%.

In contrast, JEPQ has a whopping 47.14% of its portfolio invested in its top 10 holdings, which - apart from several Nasdaq-related funds - include:

1. Apple Inc - 8.70%.
2. Microsoft Corp - 8.68%.
3. Alphabet Inc Class C - 4.91%.
4. Amazon.com Inc - 4.91%.
5. NVIDIA Corp - 3.69%.
6. Meta Platforms Inc Class A - 3.34%.

As you can see from the list above, a huge percentage of JEPQ's portfolio is invested in Magnificent Seven stocks, making it almost a proxy for a covered call strategy on mega-cap technology stocks.

Given that the Magnificent Seven and the Nasdaq at large have had such stellar performance year-to-date, this helps to explain why JEPQ has significantly outperformed JEPI over its short lifespan by an approximate two-to-one margin:

In contrast, as we can see from the chart above, JEPI's performance has been much more stable and - until this year's AI boom caused mega-cap tech stocks to soar - had been outperforming JEPQ.

Investor Takeaway

Notable investors like Jeffrey Gundlach and Peter Lynch have recently raised concerns over the investment prospects of the "Magnificent Seven" technology stocks, as they see them as being overvalued, especially in the face of a potential economic and market downturn given that recession risks remain elevated and several leading market valuation models imply that the market is overpriced right now.

Given these concerns, we believe that JEPI is a more attractive option than its sister ETF JEPQ right now for investors looking to invest in an ETF that generates attractive monthly dividends. While it is true that JEPQ has a higher trailing twelve-month dividend yield and has significantly outperformed JEPI since going public, this outperformance has largely been driven by JEPQ's much greater allocation to mega-cap tech stocks. This means that - if leading investors like Gundlach and Lynch are correct - the roles will reverse and JEPI will likely outperform JEPQ moving forward.

Furthermore, JEPI has a much better-diversified portfolio than JEPQ, with 40 more individual holdings, a greater balance between sectors, and its top 10 holdings account for only 16.04% of the portfolio as opposed to the over 50% number for JEPQ. This diversification provides a cushion against market volatility and sector-specific downturns, making JEPI's performance more stable over time.

Therefore, while JPMorgan Nasdaq Equity Premium Income ETF may have outperformed JPMorgan Equity Premium Income ETF in the short term, the latter's diversified approach might make it a more attractive investment in the current market environment, especially for those who are cautious of an impending economic downturn and leery of the current high valuation of tech stocks. JEPI's stability and diversification should better position it to navigate potential market corrections, making it a prudent choice for investors seeking to mitigate risk while still generating significant monthly passive income.

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