If you like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) then you will love its 11.9% yield counterpart, the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ). What is the difference between JEPI and JEPQ, and is JEPQ a strong choice for investors to build their portfolios? Let’s find out.
What is the difference between JEPI and JEPQ?
JEPI is JPMorgan’s well-known and much-discussed covered-call ETF that yields around 10.5% and pays monthly dividends and has taken the market by storm since its launch in 2020. With net inflows of $10 billion this year at the end of June, it is now the most popular actively managed ETF on the market.
JEPQ takes a similar approach to JEPI, selling one-month out-of-the-money call options to generate income and paying monthly dividends to holders (investors should be aware that these month-to-month distributions may vary from month to month).
At 11.9%, JEPQ offers an even greater dividend yield than JEPI. The ETF is much smaller than JEPI, with about $4 billion in assets under management compared to $28 billion for JEPI. JEPQ is also newer than JEPI, launched in May 2022.
The main difference is that while JEPI invests in US large-cap stocks and aims to deliver a significant portion of the S&P 500’s total returns with less volatility, JEPQ takes a similar approach, but instead uses the Nasdaq 100 as its investment universe .
Like JEPI, JEPQ has an expense ratio of 0.35%, which is higher than many of the popular passively managed index funds, but not bad for an actively managed fund.
Finally, note that JEPI and JEPQ are managed by the same team of portfolio managers.
JEPQ’s “beautiful” portfolio
JEPQ owns 81 stocks and the top 10 holdings account for 58.7% of the assets. Therefore, JEPQ is much more concentrated than JEPI, where the top 10 positions make up only 17.5% of the assets. For example, the two most important holdings, Microsoft and Apple, together make up almost 25% of the fund.
Below is an overview of JEPQ’s top 10 holdings using TipRanks’ holdings tool.
Because it invests in Nasdaq stocks, JEPQ’s portfolio is much more tech-focused than JEPI’s. The much-discussed “magnificent seven” (the aforementioned Microsoft and Apple, plus Alphabet, Amazon, Nvidia, Meta Platforms and Tesla), which have accounted for a large portion of the total market gains this year, are all present in JEPQ’s top 10 and together make up about half of the fund.
In addition to the magnificent seven, the rest of the fund includes many other large-cap growth stocks, including numerous software names and semiconductor companies. There are also positions in some Nasdaq-listed consumer staples, such as Costco, Pepsico and Mondelez.
Is JEPQ Stock a Buy, According to Analysts?
As for Wall Street, JEPQ has a moderate buy consensus rating as 70.6% of analysts’ ratings are buy, 26.55% hold and 2.85% sell. At $51.08, JEPQ’s average price target implies ~7% upside.
JEPQ only launched in May 2022, so it doesn’t have a long track record for potential investors to evaluate. However, it has a strong total return of 24.9% year-to-date and 16.4% over the past year.
No free lunch
As with JEPI, investors should be aware that achieving these high returns requires some sacrifices. By selling covered calls to generate revenue, JEPQ is likely missing out on some advantage when the stocks it owns rise. You can see this dynamic playing out in real time this year, using a standard Nasdaq 100 ETF like the Invesco QQQ Trust ETF (NASDAQ:QQQ) as an easy-to-invest proxy for the Nasdaq.
QQQ has a total return of 40.4% year-to-date, while JEPQ’s total return for 2023 is 24.9%, significantly outperforming JEPQ. QQQ has also outperformed JEPQ over the past year, with a total return of 26.4% versus JEPQ’s total return of 16.4%.
A total return of 24.9% slightly above the mid-year mark isn’t something many investors will complain about, but it must be said that it falls significantly short of the total return of a simple Nasdaq ETF like QQQ. The same can be said for returns over the 12 months. We don’t know if this gap will persist over time, but for now it seems fair to say that JEPQ underperforms the Nasdaq during a bull market.
To be fair to JEPQ, part of its strategy is to reduce volatility and downside effects, so it’s also possible we could see JEPQ outperform vanilla Nasdaq ETFs like QQQ during the next bear market. The tech sector and the Nasdaq were in a bear market last year, but JEPQ didn’t launch until May 2022, almost halfway through the year, so we don’t yet know how it would perform over a full market cycle.
Nevertheless, JEPQ’s counterpart, JEPI, held up better than the broader market last year, so it seems likely that JEPQ could do the same.
However, this may be something many investors agree with. There are many investors who like the downside protection that JEPQ offers and are fine with forgoing some capital appreciation to achieve it. In addition, some income-oriented investors are content with the idea of a double-digit dividend yield and a monthly dividend payment they can rely on.
For these reasons, it depends on your individual preferences and investment goals whether an investment in an ETF such as JEPQ is the right fit for your portfolio. Since it gives less exposure to the long-term upside of the market, I wouldn’t make JEPQ my only holding or the majority of my portfolio.
However, I am intrigued by the idea of adding the strength and ingenuity of many of the world’s top technology companies, such as Microsoft, Nvidia and Tesla, to my portfolio with an ETF that also offers a dividend yield of 11.9%.
Because of this combination, JEPQ can fit nicely as part of a well-rounded portfolio. JPMorgan explains that JEPQ’s role in a portfolio is to add income and provide diversified, lower-risk equity exposure, while also “preserving capital growth prospects”, and this is a sensible way to go
to a vehicle like JEPQ watch.
While it may not outperform the Nasdaq in terms of total return, it may be worth considering it as a unique asset that replaces the fixed income component in a portfolio. This asset can generate income and potentially provide a differentiator position in the event of a market downturn, making it an attractive option.