Optional revenue ETFs have gained significant popularity this year, especially due to rising volatility and uncertainty in the markets. A prominent example is the JPMorgan Nasdaq Equity Premium Income ETF, known as JEPQ, which has made it into the Top 10 ETFs by inflow, attracting $5.7 billion in new investments. Its sister fund, the JPMorgan Equity Premium Income ETF, referred to as JEPI, has seen an additional $3.5 billion influx over the same timeframe.
Growth Assets
Just three years after its launch, JEPQ has amassed over $24 billion in assets, while JEPI, introduced in 2020, has grown even more, nearing $39 billion. Together, these funds have established themselves as foundational players in an increasingly popular ETF landscape, utilizing an option overlay approach to deliver consistent income to investors.
Why Optional Income ETFs?
Optional revenue ETFs commonly use targeted call strategies. These funds hold a portfolio of stocks and sell call options on those assets to generate income. The premiums received from these option sales are paid out to shareholders as dividends. While this method provides cash flow, it can also cap potential profits if the underlying stocks perform strongly, which limits the funds’ upward potential.
JEPI vs. JEPQ
Both JEPI and JEPQ implement a covered call strategy, selling call options while managing stock portfolios to create income through option premiums. JEPI derives revenue from a blend of option sales and investments in large U.S. stocks, aiming for monthly income from related premiums and dividends. It takes a somewhat complex route by employing Equity Link Notes (ELNs), which are structured debt instruments tied to the returns of the S&P 500 Cover Call Strategy. Around 20% of JEPI’s assets are in these ELNs, while the remainder is invested in a selection of low-volatility, value-oriented U.S. stocks, and the fund also considers ESG factors in its stock choices.
Meanwhile, JEPQ follows a similar strategy, but focuses on the high-tech NASDAQ-100 sector. It generates income through option sales and investments in larger growth stocks, striving for a steady income stream from related premiums and dividends. Like JEPI, it uses ELNs to mimic a covered call approach and provides monthly income, seeking high yields with lower volatility compared to benchmarks.
Performance
Since its introduction in 2020, JEPI has delivered returns of about 70%, comparable to its peer, the Global X S&P 500 Cover Call ETF (XYLD), which gained 56% in the same period. JEPI’s returns outperform the 107% return of the SPDR S&P 500 ETF Trust (SPY) and align closely with the iShares MSCI USA Minimum Volatility Factor ETF (USMV).
On the other hand, JEPQ has returned 44% since its launch in 2022, surpassing the 20% gain of the Global X Nasdaq 100 Cover Call ETF (QYLD). However, it trails the 57% return of the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 without using options.
