If you like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) then you’re going to love its 11.9%-yielding counterpart, the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ). What’s the difference between JEPI and JEPQ, and is JEPQ a strong choice for investors to build their portfolios around? Let’s find out.
What’s the Difference Between JEPI and JEPQ?
JEPI is JPMorgan’s well-known and much-discussed covered-call ETF that yields about 10.5% and pays a monthly dividend that has taken the market by storm since its 2020 launch. With $10 billion in net inflows this year as of late June, it is now the market’s most popular actively-managed ETF.
JEPQ takes a similar approach to JEPI, selling one-month, out-of-the-money call options to generate income and paying a monthly dividend to its holders (investors should be aware that these distribution payments can vary from month to month).
JEPQ sports an even larger dividend yield than JEPI at 11.9%. 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, having launched in May of 2022.
The key difference is that while JEPI invests in large-cap U.S. stocks and seeks to deliver a significant portion of the total returns of the S&P 500 with less volatility, JEPQ takes a similar approach but instead uses the Nasdaq 100 as its investment universe.
Like JEPI, JEPQ sports a 0.35% expense ratio, which is higher than that of many of the popular passively-managed index funds but isn’t bad for an actively-managed fund.
Lastly, note that JEPI and JEPQ are run by the same team of portfolio managers.
JEPQ’s “Magnificent” Portfolio
JEPQ holds 81 stocks, and its top 10 holdings account for 58.7% of assets. Therefore, JEPQ is much more concentrated than JEPI, where the top 10 holdings make up just 17.5% of assets. For instance, its top two holdings, Microsoft and Apple, combine to make up almost 25% of the fund.
Below is an overview of JEPQ’s top 10 holdings using TipRanks’ holdings tool.
Because it is investing in Nasdaq stocks, JEPQ’s portfolio is much more tech-centric than JEPI’s. The much-discussed “magnificent seven” (the aforementioned Microsoft and Apple, plus Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla), which have driven much of the overall market’s gains this year, are all present within JEPQ’s top 10 holdings and combine to comprise roughly half of the fund.
Beyond the magnificent seven, the rest of the fund includes many other large-cap growth stocks, including plenty of software names and semiconductor companies. There are also positions in a few Nasdaq-listed consumer staple stocks, such as Costco, Pepsico, and Mondelez.
Is JEPQ Stock a Buy, According to Analysts?
Turning to Wall Street, JEPQ has a Moderate Buy consensus rating, as 70.6% of analyst ratings are Buys, 26.55% are Holds, and 2.85% are Sells. At $51.08, the average JEPQ stock price target implies ~7% upside potential.
JEPQ only launched in May of 2022, so it doesn’t yet have a long track record that potential investors can 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 is the case with JEPI, investors should consider the fact that to achieve this high yield, some sacrifices need to be made. By selling covered calls to generate income, JEPQ likely forgoes some upside when the stocks it holds are surging. You can see this dynamic playing out in real time this year, using a basic Nasdaq 100 ETF like the Invesco QQQ Trust ETF (NASDAQ:QQQ) as an easily-investable 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%, outperforming JEPQ by a wide margin. QQQ is also outperforming 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% just over halfway through the year is not something many investors will complain about, but it has to be said that it lags the total return of a simple Nasdaq ETF like QQQ by a significant margin. The same can be said for the trailing-12 month returns. We don’t know if this gap will persist over time, but for now, it seems fair to say that JEPQ is underperforming the Nasdaq during a bull market.
In fairness to JEPQ, part of its strategy is to mitigate volatility and downside, so it’s also possible that 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 only launched in May of 2022, nearly midway through the year, so we don’t yet know how it would perform during a full market cycle.
Nevertheless, JEPQ’s counterpart, JEPI, held up better than the broader market last year, so it does seem likely that JEPQ would be able to do the same.
However, this might be something many investors are okay with. There are many investors out there who like the downside protection that JEPQ offers and are okay with forgoing some capital appreciation in order to achieve this. Furthermore, some income-oriented investors are satisfied with the idea of a double-digit dividend yield and a monthly dividend payment that they can rely on.
For these reasons, whether an investment in an ETF like JEPQ suits your portfolio depends on your individual preferences and investment goals. Because it gives less exposure to the long-term upside of the market, I wouldn’t make JEPQ my only holding or the largest piece of my portfolio.
However, I am intrigued by the idea of adding the power and ingenuity of many of the world’s top technology companies, like Microsoft, Nvidia, and Tesla, to my portfolio with an ETF that also comes with an 11.9% dividend yield.
Because of this combination, JEPQ can fit in nicely as one component of a well-rounded portfolio. JPMorgan explains that JEPQ’s role in a portfolio is to add income and provide diversified equity exposure with lower risk while also “maintaining prospects for capital appreciation,” and this is a sensible way to look at a vehicle like JEPQ.
While it might not surpass the Nasdaq in terms of total returns, viewing it as a unique asset that substitutes the fixed income component in a portfolio could be worthwhile. This asset can generate income and possibly offer some distinctive exposure in case of a market downturn, making it an attractive option.
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