JPMorgan Nasdaq Equity Premium Income provides attractive income by forgoing the upside of its growth-heavy index. The strategy benefits from an experienced options manager and thoughtful implementation, but downside risk and opportunity cost weigh heavily on this fund. 

This fund combines a systematic approach to selling one-month call options with an underlying equity portfolio that stays close to the Nasdaq-100 Index. The manager targets 30-delta out-of-the-money calls, leaving modest room to capture the index’s upside. He reduces the path dependency of its options strategy by staggering its one-month calls into weekly tranches. The fund uses equity-linked notes, or ELNs, that mimic the profits on written call positions instead of holding the options themselves. Tax treatment of ELNs is often favorable for capital gains on equity returns but can be disadvantageous for options profits. ELNs carry additional counterparty risk, but the team at J.P. Morgan diversifies its issuer risk and transacts only with global financial institutions that pass their regular counterparty risk monitoring. 

Using a more volatile and growth-leaning index allows the strategy to capture larger volatility risk premiums but runs the risk of eroding total returns over a full market cycle. The eye-catching premiums that the fund has paid out so far have come from selling the upside on the Nasdaq-100 Index, which consists mostly of high-growth stocks. During rallies, the fund doesn’t participate past the short call strike price and pays out its call premiums and dividends as distributable income. The strike price on its calls averaged around 2.5% historically, its upside cap for the one-month period of the calls. For context, more than 40% of the index's monthly returns since its inception exceeded 2.5%, with most up-months clocking in between 2.5% and 7.5%. The fund’s short track record has so far coincided with high implied volatility and high interest rates, which boded well for its call premiums. However, it’s unclear whether the income will be enough to compensate for the forgone upside on the Nasdaq-100 Index in the long run when market volatility calms down.

During drawdowns, this strategy’s options income offsets some losses, and the higher implied volatility often translates to higher call premiums. However, sharp declines and the high volatility associated with the Nasdaq-100 Index exposes the fund to material downside risk. The equity sleeve has offered modest incremental improvements over the index, which may address this issue on the margins. But tight tracking error allowance and similar beta exposure leaves it exposed to much of the same risk. 

The fund’s assets have grown exponentially since the beginning of the year, amassing more than $5 billion as of August 2023. Its options are currently based on the Nasdaq-100 Index, which raises some capacity concerns. The high value of the index (about $15,000 as of September 2023) translates to a higher notional value for its options and creates unique challenges for the fund. Options volume on the index tends to be low relative to its high open interest. While it’s a popular index with ample committed capital, traders navigate more toward the smaller contracts on Invesco QQQ Trust QQQ, an exchange-traded fund that tracks the same index but has lower notional value on its options. Nonetheless, the managers have tools at their disposal to manage capacity, such as further staggering options trades or by using QQQ options, if deemed necessary. Laddering the options on a weekly basis, which they are already doing, also helps.

Analyst Rating

No free lunch.

Analyst

Lan Anh Tran

Microsoft

Apple

NVIDIA

Amazon

Alphabet

Broadcom

Advanced Micro Devices

Netflix

Tesla

The cost of capping upside on a growth-heavy index limits the benefit of a nuanced options overlay. The fund earns an Average Process rating.

This strategy owns an equity portfolio that resembles the Nasdaq-100 Index while systematically selling one-month calls on the index to generate distributable income. The manager writes 30-delta out-of-the-money calls, whose strike prices fluctuated around a historical average of 2.5% above the index price. The strike price of 30-delta call options can increase further out of the money during periods of heightened volatility, typically during market downturns. This caps the strategy’s upside at the strike price for the duration of the call. While this captures an increment of upside compared with peers that sell at-the-money calls, the strategy still forgoes substantial upside on the volatile Nasdaq-100 Index. The manager sells a portion of the total call positions every week to diversify the strike price/call premiums, and reduce path dependency.

The fund packages its calls into an ELN instead of directly shorting the call options. This turns call premiums, which are taxed as capital gains, into interest income, which are taxed as ordinary income. This structure avoids the straddle or mixed-straddle tax identification that most peers have, which often recognizes all gains on the equity sleeve as short-term capital gains and preclude equity dividends from a reduced tax rate for being qualified. Depending on the market conditions, some peers also have to distribute part of their premiums as a return of capital, which is not taxable income but reduces an investor’s cost basis. However, the fund loses the ability to recognize a portion of its options profits as long-term capital gains, whose tax rate is often more favorable. Its higher-than-average payout should compensate for this tax treatment for most investors in lower tax brackets.

The use of ELNs also invites additional counterparty risk. The fund often invests around 15% of its assets in ELNs, below the 20% regulatory cap, and spreads its ELNs across four to five issuers to stay under the 5% issuer-level cap. The management team is only allowed to transact with large global financial institutions, typically global systematically important banks, or G-SIBs. They purchase ELNs from issuers offering the best income through a competitive auction process, which should tame the commission spread. 

Applied data science powers the equity sleeve on this portfolio. The model generates a distribution of expected returns for each stock, drawing on historical forecasts from J.P. Morgan’s broad team of equity analysts, company fundamentals, and alternative data sources, such as global supply chain data. The final equity portfolio mimics the Nasdaq-100 Index within a thin tracking-error band of 2%-3% while seeking incremental improvements on stocks with better risk/reward profiles.

Average

Process

An experienced manager heads up this strategy, supported by a promising team on the equity sleeve. The fund earns an Above Average People rating.

The systematic implementation of the options overlay strategy and the quantitative nature of the equity sleeve alleviates concerns about the smaller size of this team. Lead portfolio manager and strategy architect Hamilton Reiner joined the firm in 2009 and has three decades of experience in derivatives markets. Prior to joining J.P. Morgan, Reiner held senior positions across Wall Street at Barclays Capital, Lehman Brothers, and Deutsche Bank, and he spent the first 10 years of his career at O’Connor and Associates, an options specialist firm. He is supported by two junior portfolio managers who joined from the ranks of the equity analyst team, and a strong supporting institutional framework at J.P. Morgan. 

Eric Moreau and Andrew Stern utilize Applied data science to construct the equity sleeve on this fund, subject to tight constraints to the Nasdaq-100 Index. Moreau and Stern joined J.P. Morgan in 2014 and 2008, respectively. Both are comanagers on JPMorgan US Applied Data Science Value JPIVX, where they employ a similar process to a different universe of stocks. While the equity sleeve team is thinner than traditional analyst-driven teams, it’s essentially an optimized index fund that hews close to the index and does not require significant analyst resources.

Above Average

People

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.
As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans. 
The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Parent

JPMorgan Nasdaq Equity Premium Income ETF

JEPQ is an actively-managed fund of US large-cap companies from the Nasdaq-100 Index, assessed and managed using ESG factors and a proprietary data science driven investment approach. The fund also invests in ELNs in seeking income generation.

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JEPQ is well positioned for what should be a year with increased volatility due to a number of factors, including uncertainty over the future of monetary and fiscal policy. This JPMorgan Fund should benefit from what will likely be an up market, but also an environment with more uncertainty. JEPQ's options strategy should lead this fund to outperform peers for multiple reasons.

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Market volatility has returned and could persist with our ongoing macroeconomic and geopolitical risks. JEPQ offers an effective hedge against such volatility. Its dividend yield of 9.5% provides current income and downside protection.

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JPMorgan Equity Premium Income ETF

JPMorgan Equity Premium Income ETF and JPMorgan Nasdaq Equity Premium Income ETF are popular high-yield monthly pay, diversified ETFs. Both give income investors more exposure to big tech than would normally be achieved without sacrificing income yield. We compare them side-by-side and offer our take on which is the better addition to a diversified income portfolio.

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JPMorgan Nasdaq Equity Premium Income ETF is one of the largest ETFs engaged in short-volatility bets. Many analysts and news sites have been warning about 'Volmageddon 2.0' in recent days due to the proliferation of option-selling funds like JEPQ. The risks of JEPQ being wiped out like the XIV are overblown, as JEPQ's buy-write strategy does not have the same risks as the traditional 'short volatility' strategies.

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On this week's episode of ETF Prime, host Nate Geraci was joined by VettaFi Head of Research Todd Rosenbluth and Senior Industry Analyst Kirsten Chang to discuss year-to-date ETF flows and the challenges within fixed income investing. Afterward, Geraci is joined by etf.com Senior Vice President and Editor-in-Chief Kristin Myers to highlight etf.

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The first quarter of 2024 was a successful one for stock market investors as the key indices like the S&P 500, Nasdaq 100, and Dow Jones surged to their record highs. The three indices jumped by 9.19%, 7.7%, and 3.9%, respectively as US companies published strong financial results and the artificial intelligence hype continued.

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JEPQ has performed well in both downside volatility and upward-trending markets, but now is the time to deemphasize it. The dividend yield of JEPQ has dropped from 11% to 8.9% and is likely to continue decreasing due to the depressed VIX. The market is trading at all-time highs, creating an unfavorable entry point for JEPQ, which is heavily correlated with the Nasdaq 100.

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S&P 500 reaches an all-time high, with predictions of reaching 5,700 in 2024 due to AI and fintech growth. JPMorgan Nasdaq Equity Premium Income ETF is a strong candidate for generating capital appreciation and income. JEPQ has outperformed other income-producing ETFs, offering a double-digit yield and potential for upside exposure in a bull market.

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Surrounded by the smoothness of the Tuscan landscape, I have always thought that the pursuit of harmony in human activities is the first step toward happiness. I also chase a balance in investments, seeking to create a portfolio whose securities provide a steady cash flow over time and grow the nominal capital invested.

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Building a dividend income snowball for retirement provides clarity and reduces sequence of returns risk. This article provides a sample portfolio of seven funds that can easily fund a retirement with a $1.5 million nest egg. The portfolio should generate around $6,500 per month in sustainable passive income along with a hedge against bad times hitting.

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Small caps led the year-end rally, but there has been divergence among glamour stocks like Tesla and Apple as the Nasdaq 100 rallies. I make the case that owning the JPMorgan Nasdaq Equity Premium Income ETF over the Nasdaq 100 ETF is warranted heading into a sometimes-bearish calendar period. The JEPQ has nearly doubled in AUM and continues to attract new money, offering exposure to large-cap growth stocks in QQQ.

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The Dividend Harvesting Portfolio continues to perform well, generating consistent dividend income and mitigating downside risk.

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JEPQ is a Nasdaq-100 covered call ETF. It offers investors a strong 9.4% yield, and potential capital gains. Combining JEPQ with other dividend ETFs can create a well-rounded portfolio with adequate tech exposure and reduced risk.

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The stock market has seen positive gains this week, with the Nasdaq up 6.52% YTD and the S&P up 5.38%.

News for JPMorgan Nasdaq Equity Premium Income ETF ETF (JEPQ)