JEPQ - JEPQ: Solid Call-Write Strategy On Nasdaq 100 Stocks; Wait For Correction To Add

2023-08-04 11:30:27 ET

Summary

• The JEPQ ETF is a growth-focused fund that generates income by writing call options on the Nasdaq 100 Index.
• The fund has delivered solid returns since its inception and offers a trailing.
• Compared to peers, the JEPQ is a low-cost way to gain Nasdaq 100 exposure while enjoying a high distribution yield. However, I personally prefer STK's better long term success.

Recently, I wrote a bullish article on the Columbia Seligman Premium Technology Growth Fund ( STK ), noting it was a best-in-class technology CEF that writes call options on the Nasdaq 100 Index to generate income.

As I noted in my article, there are plenty of investment vehicles focusing on call-write strategies on the Nasdaq 100 Index, and sometimes it can be confusing deciding between the various choices. This article reviews the me rits of the JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ). JEPQ is the smaller sibling of the popular JPMorgan Equity Premium Income ETF ( JEPI ) that many investors swear by.

Fund Overview

The JEPQ ETF is designed to generate current income from writing call options on the Nasdaq 100 Index while owning a portfolio of Nasdaq 100 stocks. The JEPQ ETF seeks to deliver a significant portion of the Nasdaq 100 Index's returns with less volatility and higher income (Figure 1).

In a normal environment, the JEPQ ETF is expected to deliver returns that consist of the portfolio's dividends plus 8-10% in premiums from written options and market participation less any foregone upside (Figure 2).

Portfolio Holdings

Figure 3 shows the top holdings of the JEPQ ETF. Investors should note that the JEPQ ETF may hold individual securities that are included in the benchmark (Nasdaq 100 Index), as well as equity-linked notes ("ELN") tied to the returns of the Nasdaq 100 Index.

Overall, JEPQ's strategy appears to be using ELNs and individual stocks to deliver beta to the Nasdaq 100 Index, while alpha is provided from excluding stocks it does not view favourably and/or from adjusting a security's weight relative to its index weight.

Returns

The JEPQ ETF is a young fund, with an inception date of May 2022, so there is not a lot of performance data to analyze. However, it has delivered solid returns since inception, with 1Yr returns of 14.6% to July 31, 2023 and YTD returns of 28.1% (Figure 4).

However, as designed, the JEPQ ETF gives up equity upside due to its strategy of writing call options. So when the underlying index rallies strongly, like the Nasdaq 100 Index has done YTD 2023, the JEPQ ETF will lag. Figure 5 shows the Nasdaq 100 Index returns, modeled with the Invesco QQQ ETF Trust ( QQQ ).

Distribution & Yield

The main attraction of a strategy like JEPQ is to deliver a very attractive distribution yield while offering some equity upside. For many retirees and income-oriented investors, this is a very attractive combination compared to other asset classes (Figure 6).

The JEPQ ETF is currently paying a trailing 12 month distribution of $5.63 / unit or 11.6% yield (Figure 7).

JEPQ vs. Peers

As mentioned at the beginning of this article, for investors who want exposure to growth stocks while receiving high distribution yields from a call-writing overlay, there are various investment vehicles to choose from. I have previously reviewed the Global X NASDAQ 100 Covered Call ETF ( QYLD ), the Global X Nasdaq 100 Covered Call & Growth ETF ( QYLG ), and the Nuveen Nasdaq 100 Dynamic Overwrite Fund ( QQQX ) and the STK fund. How does the JEPQ compare to these peers?

First, on the fund structure, JEPQ is the cheapest fund out of the peer group by far, with only a 0.35% expense ratio (Figure 8).

Moving on to performance, on a 1Yr basis, the JEPQ has performed better than most of its peers, with the exception of the QYLG ETF (Figure 9).

Relative to QYLD, JEPQ could have performed better because it writes out of the money ("OTM") calls, which means investors are able to capture some of the capital appreciation upside. It underperforms QYLG seemingly because QYLG only writes calls on half of the portfolio and the Nasdaq 100 Index has been on a tear YTD.

Compared to STK, JEPQ's outperformance may be because its portfolio more closely track the Nasdaq 100 Index whereas STK is more focused on individual stock selection and has more returns variability. Since Nasdaq 100 performance has been driven by the 'magnificent 7' stocks YTD, it is understandable that STK would underperform. However, since JEPQ's inception, we can see that STK's performance is slightly better, which suggests STK's stock selection outperforms over the long-term (Figure 10).

Finally, comparing the distribution yields of the different funds, the JEPQ ETF is currently paying a 11.6% distribution yield compared to 12.0% for QYLD, 5.4% for QYLG, 9.8% for STK (quarterly distribution of $0.4625 plus special distribution of $1.0819) and 7.6% for QQQX.

Overall, the JEPQ ETF appears most similar to the QYLG ETF in that it offers decent capital appreciation upside while delivering a generous distribution. During strong rallies (like YTD 2023), the QYLG is superior as it has half of its portfolio unencumbered with written calls, whereas the JEPQ may be better in other market environments as it generates more income and pays a higher distribution.

In the long-run, I believe STK fund may be the best call-write strategy on technology stocks as its stock pickers have a long-track record of matching the Nasdaq 100's long-term returns while delivering generous distribution yields. However, since the STK fund is a closed-end fund, it can periodically get overbought (like it is now, trading at a 6%+ premium), unlike JEPQ's ETF structure which tend to track NAV.

After A Great Run, Look For A Pullback

After a great run from October lows, I am currently expecting the Nasdaq 100 Index to consolidate over the next few weeks/months, with important 38.2% fibonacci support level around 13,700 (Figure 11).

The equivalent level on the JEPQ ETF is $43.50.

Conclusion

The JEPQ ETF is a growth-focused ETF that aims to provide a blend of capital appreciation and current income from owning Nasdaq 100 stocks and writing call options on the index. The JEPQ ETF is a relatively new fund with only a little over a year of operating history. However, the underlying portfolio construction methodology is based on well-tested call-write strategies.

For income-oriented investors, the JEPQ ETF is a solid low-cost way to gain some exposure to capital appreciation from the Nasdaq 100 Index while enjoying a 9-11% distribution yield. I personally prefer STK's more established history of stockpicking success, but I do not see any major faults with the JEPQ ETF.

I rate the JEPQ ETF a hold at this time due to the pending correction in the Nasdaq 100 Index.

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