Many months ago, in my coverage of JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ), I discussed its fundamental difference from JPMorgan’s JEPI fund and the unique results investors could anticipate between the two funds. While there was a misconception that JEPQ was merely a tech version of JEPI, the year-to-date performance clearly indicates the distinctiveness of these two funds in terms of construction and performance.
JEPQ has emerged as one of the top performers in its class this year, surpassing not only JEPI but also a majority of well-known covered call funds. Its outperformance cannot be solely attributed to Nasdaq’s general outperformance of the S&P 500, as evidenced by its superior performance compared to other Nasdaq-based covered call funds like Global X NASDAQ 100 Covered Call ETF (QYLD) and First Trust Nasdaq BuyWrite Income ETF (FTQI).
The strength of the fund stems from its significant holdings in market-defining tech stocks such as Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), and Nvidia (NVDA), which have consistently outperformed the overall markets for more than a decade. Unlike JEPI, which primarily holds low-beta stocks, JEPQ focuses on major tech companies representing Nasdaq, most of which exhibit robust financials, solid growth, and strong profitability.
Moreover, JEPQ’s active management strategy involves selling options approximately 2% above the current price, providing a potential additional upside of approximately 1.5% per month, making a considerable difference over time. Additionally, the fund’s active management approach plays a crucial role in decision-making when managing covered call positions, presenting opportunities for strategic adjustments and optimizations on a weekly basis, setting it apart from passive management strategies.
Amidst the success of JPMorgan’s covered call funds, other investment banks, like Goldman Sachs, have recently ventured into this space with their own versions of covered call funds. This indicates a growing demand for high yield distributions and underscores the potential longevity and significance of covered call funds. However, it is vital to note that not all covered call funds are created equal, and there will be distinctions in performance among them.
While JEPQ’s emphasis on FAANG+ stocks has led to significant returns over the years, current valuations highlight potential risks associated with these stocks. Their relatively high P/E ratios suggest an unprecedented level of expensiveness, warranting caution and thorough consideration for potential investors.
In conclusion, JEPQ’s remarkable performance is attributed to its dynamic approach to covered call strategies, combined with its strategic emphasis on market-defining tech stocks. While the fund’s success is undeniable, potential investors must carefully evaluate the associated risks and align their investment decisions with their financial objectives and risk tolerance.