This ETF enables me to generate income and participate in the Nasdaq’s upside potential.
The Nasdaq-100 Index has cooled off a bit from its red-hot run. It was recently down more than 8% from its peak. Even with that decline, it’s still up more than 20% over the past year.
I recently took advantage of the Nasdaq-100‘s slump by loading up on a unique exchange-traded fund (ETF) focused on the growth-driven market index: JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.92%). The ETF supplies lots of dividend income while providing upside to the Nasdaq-100 with less volatility.
Generating income on the Nasdaq’s volatility
The JPMorgan Nasdaq Equity Premium Income ETF has a triple mandate. It seeks to distribute income to investors each month while providing equity exposure to the Nasdaq-100 with less volatility.
One leg of the ETF’s strategy is writing out-of-the-money call options on the Nasdaq-100 index. Selling calls generates options premium income, which the ETF distributes to investors each month.
That income really adds up. The annualized yield on its last payment was 9.6%. Meanwhile, the yield on its payments over the trailing 12-months is 10.1%. That’s much higher than other asset classes. For example, high-yield junk bonds yield 7.7%. As someone who loves generating passive income, this ETF is right in my wheelhouse.
One drawback of the ETF’s income stream is that it fluctuates from month to month based on the options income it generates. Options premiums rise and fall based on volatility. With the Nasdaq-100 selling off recently, the implied volatility on its options should increase, which should boost the premium income this ETF can generate in the near term.
Upside to the Nasdaq-100 with less volatility
Writing options on the Nasdaq-100 is only one aspect of this ETF’s investment strategy. It also holds a portfolio of stocks, many of which are in that index. However, instead of benchmarking to the index, it uses an applied data science approach and fundamental research process to construct an optimized portfolio. That allocation strategy can benefit the ETF or detract from its results.
For example, the fund has a higher allocation to AI chip giant Nvidia than the Nasdaq-100. That benefited it in the second quarter as the stock’s outperformance boosted the ETF’s results. Meanwhile, it has a lower weighting to Intel, which added to its results in the period when the semiconductor stock underperformed.
However, the ETF’s allocation strategy doesn’t always work out. Its overweight allocations to Lowe’s and Bristol Myers Squibb detracted from its results in the second quarter. Lowe’s underperformed because of a weaker housing market, while Bristol Myers delivered poorly received first-quarter results due to underperformance in some recently launched products. As a result, the fund underperformed its benchmark in the period, coming in at 4.9% compared with 8.1% for the Nasdaq-100. On a more positive note, the fund’s managers believe those laggards will turn things around in the coming quarters and positively contribute to its performance.
The ETF’s aim isn’t to outperform the Nasdaq-100. Instead, it seeks to deliver equity market upside with lower volatility. It has done that by providing a 16.9% annualized return since its inception in May 2022, compared with 21.9% for the index. Meanwhile, its income payments have helped offset market volatility, especially since they tend to be higher following market sell-offs. Those features make the fund ideal for those who want equity-like returns with less volatility.
An ideal time to add
The JPMorgan Nasdaq Equity Premium Income ETF is an ideal fund for my investment strategy. It supplies lots of passive income and upside potential. I think the recent sell-off in the Nasdaq was a great time to add to this ETF. I got a lower price, which should boost my income yield and upside potential as the stocks it holds grow in value. I plan to continue loading up on this ETF if the Nasdaq-100 keeps sliding.
Matt DiLallo has positions in Bristol Myers Squibb, Intel, JPMorgan Nasdaq Equity Premium Income ETF, and Lowe’s Companies and has the following options: long January 2025 $30 calls on Intel, short January 2025 $30 puts on Intel, short November 2024 $45 calls on Intel, and short October 2024 $45 calls on Intel. The Motley Fool has positions in and recommends Bristol Myers Squibb and Nvidia. The Motley Fool recommends Intel and Lowe’s Companies and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.