If you like the JPMorgan Equity Premium Income ETF (NYSEARCA: JEPI) then you’ll love its 11.9% efficient counterpart, the JPMorgan Nasdaq Equity Prime Income ETF (NASDAQ: JEPQ). What is the difference between JEPI and JEPQ, and is JEPQ a solid choice for investors to build their portfolios around? 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 earns around 10.5% and pays a monthly dividend that has taken the market by storm since its launch in 2020. With $10 billion net inflows 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 out-of-the-money call options for a month to generate income and paying a monthly dividend to its holders (investors should be aware that these distribution payments may vary from month to month). to the other).
JEPQ has an even higher dividend yield than JEPI at 11.9%. The ETF is much smaller than JEPI, with around $4 billion in assets under management, compared to JEPI’s $28 billion. JEPQ is also newer than JEPI, having launched in May 2022.
The key difference is that while JEPI invests in large-cap US stocks and seeks 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 universe. of investment.
Like JEPI, JEPQ sports an expense ratio of 0.35%, which is higher than most 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.
The “magnificent” portfolio of JEPQ
JEPQ holds 81 shares and its top 10 holdings represent 58.7% of assets. Consequently, JEPQ is much more concentrated than JEPI, where the top 10 holdings represent only 17.5% of assets. For example, its two largest 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 invests in Nasdaq stocks, JEPQ’s portfolio is much more technology-focused than JEPI’s. The much-talked-about “Magnificent Seven” (the aforementioned Microsoft and Apple, plus Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla), which have generated much of the overall market gains this year, are all in the top 10. main holdings of JEPQ and combine to represent approximately half of the fund.
Beyond the Magnificent Seven, the rest of the fund includes many other large-cap growth stocks, including many names in software and semiconductor companies. There are also positions in a few Nasdaq-listed consumer staples stocks, such as Costco, Pepsico and Mondelez.
Is JEPQ stock a buy, analysts say?
On 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 approximately 7% upside potential.
Performance of JEPQ
JEPQ only launched in May 2022, so it doesn’t yet have a long track record for potential investors to assess. 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 must take into account that to achieve this high return, certain sacrifices must be made. By writing covered call options to generate income, JEPQ is likely giving up some benefits when the stock it holds goes up. You can see that dynamic playing out in real time this year, using a core 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 has also outperformed JEPQ over the past year, with a total return of 26.4% compared to a total return of 16.4% for JEPQ.
A total return of 24.9% just over halfway through the year isn’t something many investors will complain about, but it has to be said that it lags the total return of a simple Nasdaq ETFs like QQQ by a significant margin. The same can be said for the returns of the last 12 months. 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 smooth out volatility and downside, so it’s also possible that we could see JEPQ outperform vanilla Nasdaq ETFs like QQQ in 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 mid-year, so we don’t yet know how it would fare during a full market cycle.
Nonetheless, JEPQ’s counterpart, JEPI, held up better than the broader market last year, so it seems likely that JEPQ would be able to follow suit.
However, it might suit many investors. Many investors appreciate the downside protection offered by JEPQ and are willing to forgo some capital appreciation to achieve it. Additionally, some income-oriented investors are happy with the idea of a double-digit dividend yield and a monthly dividend payout they can count on.
Key takeaway for investors
For these reasons, whether investing in an ETF like JEPQ is right for 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 biggest piece of my portfolio.
However, I’m intrigued by the idea of adding the power and ingenuity of many of the world’s biggest tech companies, like 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 perfectly as part of a well-balanced portfolio. JPMorgan explains that JEPQ’s role in a portfolio is to add income and provide diversified equity exposure with lower risk while “maintaining prospects for capital appreciation”, and that’s a sensible way to consider a vehicle like JEPQ.
While it may not top the Nasdaq in terms of total returns, viewing it as a single asset that replaces the fixed income component of a portfolio might be worthwhile. This asset can generate income and possibly offer particular exposure in the event of a market decline, which makes it an attractive option.
Disclosure