2023-08-03 12:19:04 ET
Summary
- The Nasdaq 100 ETF (QQQ) has been about sideways since mid-June and increased volatility has emerged in the tech space.
- JPMorgan Nasdaq Equity Premium Equity Income Fund (JEPQ) is recommended for a covered call strategy due to higher implied volatility.
- JEPQ has strong performance, low expenses, and a robust trading volume, making it an attractive option compared to QQQ which could endure struggles through early October.
- I highlight key price levels to watch on the chart as earnings season presses on.
We're finally starting to see some selling pressure enter the tech space. In fact, the Nasdaq 100 ETF ( QQQ ) has been about unchanged from mid June, back when A.I. fervor was perhaps reaching its climax. Amid some weak second quarter earnings reactions lately, and with a pair of tech titans on deck to issue Q2 results Thursday night, volatility has kicked up in the TMT part of the market. The Nasdaq 100 Volatility Index (VXN) is nearing its highest mark since this past April. I assert that a move above the mid-20s could usher in an extended period of more wild price action compared to the last several weeks of tranquility.
I have a buy rating on the JPMorgan Nasdaq Equity Premium Equity Income Fund ( JEPQ ). Higher implied volatility means collecting more income from selling options with this strategy, and neutral seasonal trends in the Nasdaq 100 lay the groundwork for the best scenario to be long or overweight a covered call strategy.
Nasdaq 100 Volatility: IV Perking Up, Nearing Multi-Month Highs
TradingView
According to the issuer , JEPQ generates income through a combination of selling options and investing in US large-cap growth stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. The ETF aims to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility, and its construction includes using a long equity portfolio through a proprietary investment approach designed to drive portfolio allocations while maximizing risk-adjusted expected returns.
JEPQ: ETF Strategy - Long Nasdaq 100 Overlayed With A Covered Call Play
JPMorgan
JEPQ features a low to moderate 0.35% annual expense ratio and pays a trailing 12-month distribution yield of 11.6%. Despite its early 2022 launch, the strategy already has nearly $5 billion in assets under management with volume rising month by month. Seeking Alpha’s Quant Rankings put JEPQ as No. 1 in its asset class (out of 30 funds) given its strong momentum , reasonable expenses, exceptional yield, and limited downside risk . Liquidity also is robust with a 30-day median bid/ask spread of just two basis points as of Aug. 2, 2023. Moreover, the 90-day average volume is nearly two million shares daily.
Digging into the portfolio of 87 holdings, JEPQ is literally off the Morningstar Style Box . Illustrated below, it’s very much a mega-cap growth ETF with just 6% allocated to mid caps, per Morningstar. Also, only 9% of the fund is considered value. So, a risk is if value more strongly asserts itself over growth in the months ahead, perhaps driven by an anti-recession trade in which cyclicals and small caps outpace large-cap growth and the so-called Magnificent Seven.
JEPQ has a lofty price-to-earnings ratio north of 25 and its price-to-book ratio is nearly twice that of the S&P 500 at 6.4. Of course, long-term earnings growth is solid with its mega-cap tech-related positions, but a PEG of nearly 3 is expensive. This is not just a stock portfolio, though. When implied volatility runs high amid sideways price action in the Nasdaq, then owning JEPQ is ideal on a relative basis. What's not great is when tech stocks surge on low volatility or when equities are in freefall. So, I assert that we're entering a favorable stretch for being overweight JEPQ over the Nasdaq 100 ETF.
JEPQ: Portfolio and Factor Analysis
Morningstar
JEPQ: Tech-Heavy, Mega-Cap-Focused Equity Exposure
JPMorgan
Seasonally, August and September can be weak months for the Nasdaq 100, according to data provided by Equity Clock . This month and the next are often about a coin flip as to whether positive returns will be had.
QQQ Seasonality: Late Summer Struggles?
Equity Clock
The Technical Take
With volatility having risen and amid some neutral seasonals, JEPQ’s chart has interesting components. I will concede that technicals on a covered call strategy should be weighed less compared to a traditional stock or long-only equity fund, but we can garner some clues here. Notice in the chart below that JEPQ investors have enjoyed a very steady uptrend with hardly any meaningful pullbacks on a total return basis.
JEPQ: Impressive Total Returns On Low Volatility
Stockcharts.com
Now, if we go price only, we see that the ETF paused at its August 2022 peak while the RSI momentum indicator at the top of the graph remains in the bullish 40 to 90 zone, though it’s testing the lower bound right now. I could see the fund pulling back further to the mid-$40s – that's where the previous breakout point took place and where the rising 200-day moving average comes into play. So, there are some bearish trend indicator that I must acknowledge as a risk.
What I like about both charts from a mechanical perspective is that volume is on the rise, indicating strong liquidity. Overall, there’s downside risk, but that also means the fund should offer alpha compared to being long QQQ outright.
JEPQ: Pausing At Its August 2022 Peak, Downside Risk to $45
Stockcharts.com
The Bottom Line
I have a buy rating on JEPQ given increasing volatility and the possibility of sideways price action, which began in mid June, continuing through early October in the Nasdaq 100. That makes selling calls an opportunistic play in the weeks ahead compared to just owning QQQ.
For further details see:
JEPQ Over QQQ Through Early October As Implied Volatility Creeps Up