JPMorgan Nasdaq Equity Premium Income ETF (JEPQ): How to Invest

You’re probably familiar with the Nasdaq-100 index—a collection of the 100 largest nonfinancial stocks listed on the Nasdaq Stock Market, which includes the behemoths of the tech industry often referred to as the “Magnificent Seven.”

These stocks have historically provided excellent capital appreciation. However, they’re not particularly known for their dividends, which can be a drawback for income-seeking investors.

Enter the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.27%), one of the best ETFs designed to allow investors to own Nasdaq stocks while also earning income through some financial engineering.

This ETF is fairly complex and tailored for advanced investors, so here’s what you need to know before considering an investment.

What is it?

What is JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)?

This ETF targets stocks from the Nasdaq-100, focusing on technology and growth sectors, but with the discretion to select stocks outside the index if they meet the fund’s criteria.

The active management component focuses on identifying undervalued stocks or those with lower volatility, while also considering environmental, social, and governance (ESG) factors.

This approach aims to construct a portfolio that captures the most of the growth potential of Nasdaq-listed companies while attempting to reduce risk exposure compared to the broader market.

The options strategy employed by this JPMorgan ETF involves the use of equity-linked notes (ELNs), which are essentially debt instruments linked to the performance of the Nasdaq-100 index. These ELNs are used to execute a covered call strategy, specifically selling out-of-the-money call options on the index.

The premiums collected from these calls are a key source of the fund’s income, enhancing its yield. This method aims to provide regular income to investors through option premiums, but can cap upside returns.

How to buy

How to buy JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)

Here’s a step-by-step general guide on how to invest in this ETF:

1. Open your brokerage app: Log into your brokerage account where you handle your investments.
2. Search for the ETF: Enter “JEPQ” into the search bar to bring up the ETF’s trading page.
3. Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this ETF. Determine the number of shares you want based on the current price and your available investment funds.
4. Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you’re willing to pay. Market orders are executed quickly at the current market price, while limit orders are set to trigger at a price you define, giving you control over the purchase price.
5. Submit your order: Confirm the details of your order, including the number of shares and order type, then submit your buy order to the market.
6. Review your purchase: Once your order is executed, check your portfolio to ensure the shares of JEPQ have been added. Review the purchase to confirm that it aligns with your investment strategy.

Warning: Ensure that you purchase the USD version of JEPQ listed on the Nasdaq, since there is a Canadian version of the ETF trading in CAD on the Toronto Stock Exchange (TSX).

Holdings

Holdings of JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)

Here are the top holdings of this ETF as of November 2024:

1. Nvidia (NVDA -0.89%)
2. Apple (AAPL 0.05%)
3. Microsoft (MSFT -0.5%)
4. Amazon (AMZN -0.38%)
5. Meta Platforms (META -0.6%)
6. Alphabet (GOOG -1.06%)
7. Broadcom (AVGO 0.04%)
8. Tesla (TSLA 9.16%)
9. Netflix (NFLX -0.43%)

JEPQ’s portfolio is heavily weighted toward the technology sector, which represents 41% of its assets, followed by communication services and consumer discretionary sectors at 13% and 12%, respectively. This aligns closely with the typical sector distribution of the Nasdaq index.

Be aware this ETF has a high portfolio turnover rate of 168%, indicating frequent trading of its holdings throughout the year.

Should I invest?

Should I invest in JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)?

This JPMorgan ETF might be an attractive option for investors seeking income while maintaining exposure to the tech-heavy Nasdaq-100.

The ETF’s strategy of combining dividend-paying tech stocks with a covered call approach provides a monthly income stream while trying to mitigate volatility associated with the tech sector via active stock picking.

However, potential investors should consider whether they are comfortable with JEPQ’s heavy exposure to the technology sector, which can be cyclical compared to more diversified funds.

The use of ELNs to implement the covered call strategy also caps the upside potential of the ETF, making it less suitable for those primarily seeking capital appreciation.

Distributions

Does JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) pay a dividend?

Yes, this ETF does pay distributions, but it’s important to note that these are not dividends in the traditional sense.

The payouts are primarily composed of ordinary income due to the fund’s use of ELN for covered call strategies. This type of income is taxed at a higher rate than qualified dividends, making it less tax-efficient.

The yield on this ETF can be quite variable, influenced by market volatility—generally, higher market volatility can lead to higher yields from the covered call strategy. As of the end of October 2024, the ETF’s 30-day SEC yield was 11.39%.

However, the distribution amounts can fluctuate significantly; the per-share distribution in 2024 was as high as $0.55686 in September and as low as $0.34167 in February.

Distributions are paid monthly, with the ex-dividend date typically on the first trading day of the month and payouts following a few days later at the end of the week.

Expense ratio

What is JPMorgan Nasdaq Equity Premium Income ETF’s (JEPQ) expense ratio?

This JPMorgan ETF has an expense ratio of 0.35%, or $35 per $10,000 invested annually. This rate is considered very affordable for an actively managed ETF that involves complex strategies such as using derivatives.

It’s worth noting that this fee is deducted from the ETF’s returns on a daily basis behind the scenes, so you don’t pay it directly out of pocket.

Historical performance

Historical performance of JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)

Performance data for JEPQ is limited, given the recent inception date for this ETF.

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Bottom line

The bottom line on JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)

This ETF offers a specific investment profile that may be particularly attractive to those bullish on technology stocks but prefer receiving gains in the form of monthly income rather than through share price appreciation.

It is especially suitable for investors who can manage its tax inefficiencies by holding it in tax-advantaged accounts like a Roth IRA.

With an expense ratio of 0.35%, the ETF is an affordable choice for accessing a strategy that has historically delivered both lower volatility and higher income.

However, investors should be aware of some downsides, such as the potential for capped total returns due to the covered call strategy and counterparty risk associated with the use of ELNs.