JEPQ - JEPQ Yields 11.40% And Can Extend Its Gains

2023-09-05 09:00:00 ET

Summary

• JPMorgan Nasdaq Equity Premium Income ETF has seen appreciation of 19.38% and generated an 8.24% yield on invested capital in 2023.
• JEPQ differs from traditional covered-call ETFs by providing monthly income without capping its upside potential.
• JEPQ's investment methodology, which combines option premiums and dividends, has outperformed other income-focused ETFs like QYLD.

The JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ) has been an investment vehicle for both appreciation and income in 2023 . Since the beginning of the year, shares of JEPQ have appreciated by 19.38% while generating $3.35 in income per share. Investors who added shares of JEPQ at the beginning of the year have seen an 8.24% yield on invested capital in addition to the 19.38% appreciation. I have been bullish on JEPQ since the beginning of the year, and I am revisiting my investment thesis because I see further upside on the horizon. Originally, I had gravitated toward covered-call ETFs for income, but the investment products from JPMorgan Asset Management are proving to be more lucrative. Going forward, I am bullish on JEPQ and feel it provides a strong synergy between potential appreciation and high yield for investors who want to generate continuous income without sacrificing most of the future appreciation.

The big difference between covered-call ETFs and JEPQ

The Global X NASDAQ 100 Covered Call ETF ( QYLD ) is the largest covered-call ETF that I know of, with $8.09 billion in assets under management [AUM]. JEPQ is also a Nasdaq 100 focused ETF with $5.21 billion in AUM that is a bit different in design as it provides monthly income without capping its upside potential. I originally started investing in the covered-call ETFs from Global X, and while I am still a shareholder, I have been gravitating more toward the investment products from JPMorgan Asset Management .

On the income side of my portfolio, I was looking for products that would generate large amounts of monthly income several years ago and came across QYLD. I became interested in QYLD because I had been writing covered calls on some of my positions to either manufacture a dividend from an equity that didn't pay one or to increase the dividend yield from an equity that paid a dividend. QYLD immediately grabbed my interest as it utilized a covered call overlay strategy that resonated with what I was already doing. JPMorgan Asset Management created similar investment products, and while they were alike from an income perspective, their methodology was vastly different.

QYLD is an ETF from Global X that invests in the companies that make up the Nasdaq 100 and own the individual underlying assets throughout its portfolio. Its investment objective is to create immediate income on a monthly basis with a secondary objective of capital appreciation. QYLD is able to generate high yields for its investors by writing covered calls against the positions in its portfolio. On a monthly basis, QYLD will write monthly call options against its portfolio to generate income, which is distributed to its shareholders. The options that are written will typically have an exercise price at or above the prevailing market price of the Nasdaq 100 index from when it was written. This is how QYLD can generate immediate income, but it also caps the amount of upside shares of QYLD can appreciate.

JEPQ is similar to QYLD as it also has a yield that exceeds 10% from an investment strategy in the Nasdaq 100, but its methodology is different. JEPQ is designed differently as it looks to generate income from a combination of creating a monthly income stream from option premiums and collecting dividends from the equities within its portfolio. JEPQ has an 80/20 split where it invests at least 80% of its assets in equities within the Nasdaq 100, while the remaining 20% is allocated toward exchange-linked notes (ELNs). JEPQ is able to generate more appreciation than QYLD, as we have seen in 2023, because its overall portfolio isn't capped from covered calls, as the option strategy of writing covered calls is predominantly confined to the ELN portion of JEPQ's portfolio.

JEPQ and QYLD's performance in 2023 compared to the Nasdaq

The Nasdaq has appreciated by 35.09% YTD after a horrific 2022. QYLD started 2023 at $15.86, and JEPQ was $40.67. YTD QYLD has appreciated by $1.62 or 10.21%, while JEPQ has increased $7.88 or 19.38% from $40.67 to $48.55. While both funds invest in the companies within the Nasdaq 100, the difference in appreciation directly results from not capping their portfolio by writing cover calls but rather utilizing the options overlay strategy through the ELN's. Shares of QYLD have trailed JEPQ by 9.16% due to the fact that it's investment methodology is predicated on an income first capital appreciation second strategy.

From an income perspective, QYLD has generated $1.38 per share in income capital YTD, which is a yield of 8.68% on invested capital. JEPQ has generated $3.35 per share in income YTD, which is a forward yield of 8.24%. QYLD's strategy has generated a slightly larger yield at the expense of significant amounts of appreciation. The tradeoff between QYLD's additional income is not enough to justify the additional capital appreciation shares of JEPQ have generated. The additional capital appreciation when markets rally is the predominant reason why I have been gravitating to JEPQ, and I expect similar results if the markets continue upward.

I believe JEPQ will continue higher because I believe we're at the beginning of a bull cycle, and the markets will continue to appreciate

JEPQ has a 49.45% allocation toward technology, and its largest equity holdings include:

• Apple ( AAPL )
• Microsoft ( MSFT )
• Alphabet ( GOOG )
• Amazon ( AMZN )
• NVIDIA ( NVDA )
• Meta Platforms ( META )
• Tesla ( TSLA )
• Adobe ( ADBE )
• Broadcom ( AVGO )
• Cisco Systems ( CSCO )

While JEPQ shouldn't have a problem generating significant monthly income, the real question remains if the markets can continue to appreciate or if the rally will fizzle out.

I looked at the analyst projections going forward through 2025 on the top-10 equities held within JEPQ's portfolio for their EPS. From the end of 2023 through 2025, these companies are expected to see their EPS increase from 9.36% to 98.15%. None of the companies are expected to see a secular decline in EPS, and the average EPS growth is projected to be 47.72%. Overall the EPS from these 10 companies is expected to grow from $111.23 in 2023 to $151.71 in 2025, which is an increase of $40.48 or 36.39% over a 2-year period. If this occurs, tech is likely to push the markets higher, and JEPQ should continue to trend upward, delivering further appreciation to shareholders.

Outside of the analyst's estimates projecting earnings growth across the board in JEPQ's top-10 companies, the environment is setting up for a bull cycle, in my opinion. We're heading into an upcoming CPI report on 9/13, then the Fed interest rate decision and economic projections coming on 9/20. CPI came in at 3.2% in July, which was above the Trading Economics Forecast of 3.1% but under the consensus number of 3.3%. At the same time, this is 0.2% higher than the June number, it's significantly lower than where we were last year at this time. Trading Economics has forecasted that CPI will come in at 3.4%, so we will see what occurs. The bigger story for me is that Core CPI continued downward from 4.8% in June to 4.7% in July. Trading Economics had forecasted for 5% in June and 4.8% in July and is forecasting for 4.5% in August.

My prediction is that if CPI and Core CPI stay where they are or come in lower, then the Fed is more likely to pause and have the narrative be data-dependent. I would take this as bullish because the St. Louis Fed has projected that rates will fall to 4.6% in 2024 and 3.4% in 2025. A Fed that is holding and getting closer to an easing cycle rather than continuing to tighten should be bullish for the markets. As rates decline, so will the cost of capital, and we should see continued economic growth as companies are more likely to spend on expanding their businesses. If that occurs, it could fuel earnings for JEPQ's top-10 holdings, as we are likely to see goods and services procured from those companies.

JEPQ has delivered a continuous stream of income for its shareholders

I originally invested in JEPQ because it was an uncapped covered-call ETF that allowed shareholders to benefit from capital appreciation while generating income. JEPQ went public in May during the crash of 2022. Since it went public, shares are still down -$2.54 or -4.97%. Shares had fallen from $51.09 on its first day of trading to $39.61 and have since regained much of their lost value.

Over this period, JEPQ generated $7.20 in dividend income, which is a 14.1% yield on invested capital at a share price of $51.09. While the monthly dividend income has fluctuated from $0.34 to $0.68, the average dividend per share that JEPQ has generated was $0.42. To date, the $7.20 in dividend income exceeds the -$2.54 in lost value per share, making JEPQ a net positive investment. The Nasdaq is still significantly lower than its all-time highs, and based on the continuous flow of income and how JEPQ has performed in 2023, JEPQ should continue higher while generating a double-digit yield if the markets continue to appreciate throughout 2023.

Conclusion

JEPQ has been one of my favorite income investments for 2023. This ETF allows me to benefit from owning big tech and the rest of the companies in the Nasdaq 100 while generating a monthly yield. JEPQ has appreciated by19.38% and generated an 8.24% yield on invested capital from the share price at the beginning of the year. The investment methodology for JEPQ has become more appealing to me than the traditional covered-call ETF strategy, and I plan on adding to my position. I believe that we're at the end of a tightening cycle and that the cost of capital will become less restrictive in 2024, which will cause a boom in the business cycle. Based on the analyst estimates, the top 10 companies within JEPQ's portfolio are expected to see their EPS increase by 47.72% on average over the next 2 years, and I believe this will push the market higher, and JEPQ will follow. If you're an income investor, JEPQ is worth looking at, as it can continue to generate additional capital appreciation while delivering large amounts of monthly income.

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