JEPQ ETF: Is This New Income Fund From JPMorgan As Good As JEPI?

The JPMorgan Equity Premium Income ETF (JEPI) is one of the most popular income ETFs in the market today, and with good reason. JEPI invests in a diversified portfolio of lower-risk stocks, boasts a double-digit dividend yield, and has seen moderate capital gains since inception. JEPI is a strong fund with many benefits and few significant drawbacks, perfect for income investors and retirees.

JPMorgan (JPM) recently launched a similar fund, the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ). Owing to JEPI’s strengths and success, thought to have a look at JEPQ, to see if it is as strong as its sister fund. JEPQ seems to fall short, although not significantly so.

JEPQ is an actively-managed fund investing in Nasdaq-100 companies. Security selection and weights are partly dependent on a proprietary investment methodology, and so the fund does not necessarily track the Nasdaq-100 index. JEPQ indirectly sells covered calls on said index, through equity-linked notes.

JEPQ’s holdings are riskier than JEPI’s, and so JEPQ is somewhat likelier to experience significant capital losses than JEPI. Covered call funds have difficulty recovering from losses, so avoiding these are crucial. JEPI does better in this regard, so I would choose JEPI over JEPQ.

There are several funds following similar strategies, including the Global X NASDAQ 100 Covered Call ETF (QYLD) and the Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX). These funds are somewhat similar to JEPQ in most respects, but avoid investing in complicated, opaque equity-linked notes. As such, I would choose these funds over JEPQ as well.

JEPQ is a reasonable investment opportunity, but there are several similar, slightly superior choices out there, which I would pick over JEPQ.

JEQP – Overview

JEPQ is an actively-managed fund investing in Nasdaq-100 companies, and indirectly selling covered calls on the same, through equity-linked notes. The fund’s strategy is as follows.

From covering other funds, I can say that JEPQ’s holdings, strategy, and expected performance are quite similar to several other Nasdaq-100 covered call funds out there. It is most similar to QYLD, previously covered here.

JEPQ invests in Nasdaq-100 companies, which encompass the largest 100 non-financial companies listed in the Nasdaq. These companies are overweight tech relative to broader equity indexes, due to excluding financials, and due to excluding large, but not gigantic, companies. There are many consumer goods, industrials, and similar companies with market-caps between $10B and $100B, but JEPQ mostly does not invest in these. It does invest in all relevant mega-cap tech stocks, including Apple (AAPL) and Microsoft (MSFT), leading to outsized tech exposure. Industry exposures are as follows.

JEPQ is an actively-managed fund, so security selection and weights are a discretionary investment decision. Both are dependent on a proprietary investment methodology, of which there is little information available. Nevertheless, from what I’ve seen, JEPQ roughly tracks its index, the Nasdaq-100, with no significant deviations from the same. JEPQ’s largest holdings are as follows.

As can be seen above, JEPQ’s largest holdings include well-known mega-cap tech stocks, including Apple and Microsoft. These also include equity-linked notes, or ELNs, highlighted in yellow. JEPQ’s ELNs are leveraged derivatives which combine the economic characteristics of investing in the Nasdaq-100 index and selling call options on the same.

Investing in these ELNs serves to significantly increase the fund’s generation of income and yield, with JEPQ sporting an SEC yield of 17.6%.

JEPQ’s trailing-twelve months yield is much lower, at 9.0%, as the fund is quite new, and has not paid dividends for an entire year. JEPQ’s dividend yield should rise to match its SEC yield in the coming months, as more dividend payments get made.

Investing in these ELNs serves to significantly reduce potential capital gains, as selling covered calls has that same exact effect. Downside potential remains unchanged.

The net effect from an increase in income but reduction in capital gains is dependent on market conditions. The net effect tends to be negative during bull markets, as capital gains are quite strong during these, usually higher than the increase in income. The net effect tends to be positive when markets are flat, as there are no capital gains during these, so the increased income predominates. The net effect is technically positive during bear markets, for the same reason, but capital losses might swamp any increase in income depending on the severity and length of the bear market.

As bull markets are the most common market scenario, stocks mostly go up, selling covered calls tends to be a net negative long-term strategy, underperforming more conventional long-only equity funds, indexes, and strategies.

As mentioned previously, JEPQ is quite similar to several other covered call ETFs, especially QYLD. Said funds sell covered calls, which reduce potential capital gains while increasing dividend yields, same as JEPQ. As JEPQ is quite similar to these funds, thought to do a quick comparison between these, which I believe will prove instructive.

JEPQ versus QYLD

JEPQ and QYLD are very similar funds, with similar strategies, holdings, characteristics, and expected performance, and with few significant differences.

Both funds invest in Nasdaq-100 companies, and sell covered calls on the same.

Both funds have strong yields, with JEPQ boasting a 17.6% SEC yield, and QYLD having a 13.2% twelve-month trailing yield.

Both funds have limited potential for capital gains.

Both funds should underperform on a total return basis relative to most equity indexes during bull markets, and in the long-term.

JEQP is actively-managed, so security selection and weights are partly dependent on the fund’s investment management team and investment strategy. Said strategy is proprietary, so it is very difficult for us to analyze. Currently, JEPQ’s holdings do not significantly differ from those of QYLD, and what differences exist do not seem reflective of any obvious investment strategy, to me at least.

JEPQ sells covered calls indirectly, through ELNs, while JEPQ directly sells covered calls. ELNs are somewhat opaque, complicated, leveraged, risky, investments, while directly selling covered calls is a relatively simple, easy to understand strategy, with clear payout profiles.

JEPQ has outperformed relative to QYLD since inception in May 2022. It is not immediately clear if JEPQ’s outperformance was due to differences in security selection, weights, or differences between ELNs and covered calls.

On the other hand, from what I’ve seen, JEPQ only materially outperformed relative to QYLD for a couple of days after inception. Performance has been materially weaker since May, with JEPQ moderately underperforming since said date.

In my opinion, although JEPQ’s performance track-record is stronger than that of QYLD, the difference is not all that significant, material, or indicative of future outperformance. JEPQ is simply too new of a fund for its outperformance to mean much, especially considering said outperformance was concentrated in a few weeks soon after inception.

In general terms, both funds are very similar choices, with similar characteristics and expected performance. I slightly prefer QYLD, as it avoids investing in complicated, opaque, risky ELNs.

JEPQ versus JEPI

JEPQ and JEPI are both similar funds, both by J.P. Morgan. Both funds similar strategies, characteristics, and expected performance, with some differences.

Both funds invest in large-cap U.S. equities. JEPQ focuses on Nasdaq-100 companies, while JEPI focuses on low-risk, low-volatility large-cap U.S. equities.

Both funds have strong yields, although JEPQ does yield quite a bit more than JEPI. JEPQ boasts a 17.6% SEC yield, while JEPI has a 11.5% twelve-month trailing yield.

Both funds have limited potential for capital gains. Due to small differences in holdings and strategies, I believe that JEPI has somewhat higher potential for capital gains, but these will ultimately depend on equity market performance.

Both funds should underperform on a total return basis relative to most equity indexes during bull markets, and in the long term.

Both funds are actively-managed, so security selection and weights are somewhat dependent on their respective investment methodologies. JEPI’s investment strategies has worked quite well in the past, with the fund outperforming during prior bear markets. As an example, JEPI posted losses of only 3.5% during 2022, significantly lower than S&P 500 losses of 18.2%.

JEPI has also significantly outperformed relative to JEPQ since inception in May 2022, mostly due to tech underperformance.

In my opinion, JEPI’s lower-risk holdings and stronger performance track-record make it a stronger investment opportunity than JEPQ. JEPI’s lower-risk holdings should be particularly beneficial for retirees, for obvious reasons.

Conclusion

JEPQ is an actively-managed fund investing in Nasdaq-100 companies, and indirectly selling covered calls on the same through ELNs. Although JEPQ is a reasonable investment opportunity, there are several similar, but slightly stronger choices out there, including JEPI and QYLD. As such, I would choose these other funds over JEPQ.