Summary
- The JPMorgan Nasdaq Equity Premium Income ETF is designed to combine the opportunity for capital appreciation while distributing income.
- The fund pursues a somewhat growth-focused portfolio allocation (Nasdaq-100 constituents), while writing call options on the asset base.
- Selling calls is especially attractive in a high-volatility environment, with the VIX consistently trading at levels greater than 20.
- The JEPQ strategy enabled the fund to offer an attractive income yield, with monthly pay-outs in 2022 consistently close to 1% of asset value.
Generally speaking, investing in growth-focused opportunities offers the potential for capital appreciation. However, while waiting for higher prices, investors usually need to forgo recurring income/ dividends. The JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ ) is designed to combine the opportunity for capital appreciation while distributing income: The investment objective of the fund is to seek current income and capital appreciation by creating an actively managed portfolio of equity securities with exposure to the Nasdaq-100 Index, as well as premia from equity-linked notes.
For reference, although JEPQ ETF shares have underperformed the Nasdaq-100 ( NDX ) benchmark since inception by about 7 percentage points, accounting for the fund's close to 10% dividend yield renders the JEPQ index a relative outperformer.
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JPMorgan Nasdaq Equity Premium Income ETF
The JPMorgan Nasdaq Equity Premium Income ETF was launched 3rd May, 2022 and targets a combination of sustainable capital appreciation and high income yield by selling equity linked notes, such as call options, on blue-chip growth companies. Or as communicated through the ETF's prospectus:
The investment objective of the Fund is to seek current income while maintaining prospects for capital appreciation. The Fund seeks to achieve this objective by (1) creating an actively managed portfolio of equity securities comprised significantly of those included in the Fund’s primary benchmark, the Nasdaq-100 Index® (the Benchmark), and (2) through equity-linked notes (ELNs), selling call options with exposure to the Benchmark.
With that frame of reference, the fund invests at least 80% of its assets in equity securities and seeks to provide monthly distributions at a stable level through the collection of volatility premia.
One benefit of the fund‘s strategy is to provide investors with performance that captures most of the returns associated with the Nasdaq-100, while exposing investors to lower volatility than the benchmark through the distribution of income.
Growth-Focused Portfolio Allocation
As the name JPMorgan's Nasdaq Equity Premium Income ETF implies, the JEPQ ETF invests in Nasdaq-listed equities--with the 10 major single stock holdings as below.
JEPQ Prospectus
For reference, I have a 'Strong Buy' rating on securities marked dark green, a 'Buy' on securities marked green, a 'Hold' on securities marked yellow, and a 'Sell' on securities marked red respectively. Non-colored securities are not covered.
Admittedly, I have a 'Sell' rating on Amazon ( AMZN ) as well as a 'Hold' recommendation on Nvidia ( NVDA ), Microsoft ( MSFT ) and Apple ( AAPL ). However, in combination with a call-overwrite strategy (as discussed in the next section), I am less concerned about the possible downside.
As of February 18th , the JEPQ fund claims a beta as low as 0.72 and a P/E of slightly more than x22. Moreover, JPMorgan's Nasdaq Equity Premium Income ETF reports that the fund's 1-year standard deviation is 22.4%, versus 30.5% for the Nasdaq 100 benchmark.
JEPQ Prospectus
Call Overwrite Makes Perfect Sense
Perhaps the most attractive value proposition for JEPQ is anchored on the fund’s high income yield-- equal to 9.96% for the trailing twelve months. The JPMorgan Nasdaq Equity Premium Income ETF invests in Nasdaq-listed growth stocks, while also selectively selling out-of-the-money call options on the underlying securities to generate an additional monthly income. With that frame of reference, it is worth pointing out that there is no/ little risk associated with selling call options on growth stocks, because the ETF's underlying holdings provide direct coverage. The main risk for JEPQ investors is that, if the ETF’s portfolio holdings were to rise sharply, investors would lose out on some of the delta (above strike).
Needless to say, this call-overwrite strategy is particularly advantageous in a high-volatility market environment. And as markets continue trade in such volatile environment, the fund has been able to deliver attractive monthly pay-outs in 2022, consistently approaching 1% of asset value.
JEPQ Prospectus
Risks
There are two major risks that I would like to highlight for JEPQ investors. First, investors should consider that the JPMorgan Nasdaq Equity Premium Income ETF remains an equity portfolio. Accordingly, even though the asset allocation is somewhat defensive, given the call-overwrite strategy, the fund's performance might not be immune to a sharp repricing for equities. Second, the JEPQ ETF is not ideal for investors who are looking for capital appreciation opportunities, even though the fund's holdings are skewed towards growth factors. The reasoning is simple: selling call options limits the upside potential that might be realized in a bull market. Accordingly, if bullish sentiment would return, such a capital allocation strategy generally underperforms benchmark strategies that do not sell call options on portfolio holdings.
Conclusion
JPMorgan Nasdaq Equity Premium Income ETF is a 'Strong Buy', in my opinion. Reflecting on the current macro-environment, I argue that selling call options on Nasdaq-listed growth companies is poised to outperform equity-linked alternatives, as well as fixed-income securities such as US-treasuries, which have provide a lower income yield and are expected to lose about 1-2% of value due to inflation.
Moreover, given that implied volatility premia for most growth equities are rich and upside limited (my opinion), the additional income from writing call opinions on JEPQ's asset base is highly attractive. Finally, investors may also find it appealing that the ETF has relatively low costs, with net expenses that can be as low as 0.35% annually.
For further details see:
JEPQ: Enjoy The Fruits Of Both Growth And Income