The JPMorgan NASDAQ Equity Premium Income ETF (JEPQ) stock has done well this year and is now hovering near its all-time high, helped by the ongoing artificial intelligence boom.
While the JEPQ ETF stock has jumped by just 4.15% this year, its total return was 14.15%, higher than that of JEPI, which has returned 6.15%. This article explores whether this fund is a good buy.
What is the JEPQ ETF?
JEPQ is a top exchange-traded fund that gives investors exposure to technology companies, while providing them with high and regular dividends.
The fund achieves this largely by using a strategy of buying all companies in the Nasdaq 100 Index. This includes companies like Nvidia, Apple, and Microsoft. By doing this, investors benefit as these stocks continue their strong rally.
At the same time, the ETF writes or sells call options on the Nasdaq 100 Index. Doing that provides it with income in form of the options premium, which it uses to distribute to investors. The fund also receives dividends from its portfolio companies.
The main reason why investors have allocated $31 billion in the JEPQ ETF is that it has a 10% dividend yield, with the returns being distributed monthly. This yield is much higher than that of other ETFs that track the Nasdaq 100 indices like QQQ and QQQM, which pay less than 2%.
Income investors also allocate money on the fund as an alternative to the bond market. Data shows that the 10-year yield stands at 4.083%, while the 30-year and 2-year stood at 4.6% and 3.56%. As such, an investment in this fund provides more returns.
JPMorgan NASDAQ Equity Premium Income ETF is riding the AI wave
The JEPQ ETF is hovering near the all-time high today as investors focus on the artificial intelligence wave. A closer look at the Nasdaq 100 constituents shows that most of them are in the AI industry.
Micron stock price has jumped by 183% this year, while Palantir has soared by 150%. Lam Research is up by 118%, while AMD, KLA Corporation, Intel, CrowdStrike, Alphabet, and Broadcom have soared by over 50%.
These companies are all benefiting from the increased investments in the AI industry. Precisely, they are seeing strong demand from OpenAI, which has reached deals worth over $1 trillion.
Still, there is a lingering doubt on whether the AI boom will continue and whether the bubble will burst. Some investors have pointed to the circular nature of AI investments as all companies in the sector are related. Also, Softbank has offloaded its Nvidia shares.
The JEPQ ETF is also benefiting from the actions from the Federal Reserve, which has started to cut interest rates. It slashed rates by 0.25% in September, and analysts expect it to slash again in December.
Is JEPQ’s 10% dividend yield worth it?
JEPQ ETF and most covered call ETFs always sound too good to be true in that they give investors an exposure to an asset and a high dividend return.
The reality, however, is that JEPQ ETF investors normally make less money than QQQ and QQQM investors. For example, the fund’s total return this year is 14%, while the QQQ has returned 22%.
This performance is because of how the options section of the fund is designed. In an options trade, there is usually a strike price and an expiry period. If the underlying index jumps, the strike price is hit, meaning that it does not participate in the rally.
A closer look at all covered call ETFs like JEPI, QYLD, XYLD, and DIVO always lag behind their underlying assets.
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