JPMorgan's Nasdaq Equity Premium Income ETF Offers Lucrative Income, Yet it carries Associated Threats
As a dividend investor, you might find joy in having an exchange-traded fund (ETF) that surges 15% in a year while providing a high-single-digit return. That's precisely what the JP Morgan Nasdaq Tech Income ETF (JEPQ -0.36%) offered investors over the past 52 weeks. However, prior to investing in this ETF, it's crucial to contemplate the potential risks.
What does the JP Morgan Nasdaq Tech Income ETF offer?
The JP Morgan Nasdaq Tech Income ETF is an actively managed ETF that invests in the stocks from the Nasdaq-100 index. This index consists of the 100 largest companies that are traded on the Nasdaq exchange. Over time, the mix of companies in the index varies, but it has a robust history of being technology-focused. The ETF, on its own, doesn't stand out too much.
Where it gets intriguing and where the active management comes into play is with its options strategy. Essentially, the ETF sells covered calls to generate revenue that can be distributed to shareholders. This strategy is commonly used and can actually perform better during volatile periods, as the best opportunities to sell options typically arise during turbulent times. The focus on technology in the Nasdaq-100 index often results in volatile performance, making this strategy a fitting fit.
As the chart below demonstrates, the ETF's price increased by 15% over the past year. However, if we take into account dividend reinvestment, the JP Morgan Nasdaq Tech Income ETF rewarded investors with a 27% return. At the moment, the yield, based on the latest dividend payment, is listed at 9.5%.
Even Wall Street titans don't receive free investments
Total return is a valuable metric to use when comparing investments. However, most income investors are unlikely to reinvest the dividends they earn from the JP Morgan Nasdaq Tech Income ETF. You buy this ETF to generate income that can be used to cover living expenses. With that in mind, the income stream provided by this ETF is unstable, as the income generation through selling options is an ongoing tactic. In some timeframes, it will yield more income than in others.
Over the past year, the monthly dividend payout has fluctuated between around $0.34 per share and $0.55. That's a substantial range, and, importantly, it means the dividend yield that is displayed on most online quote services can't be fully trusted. The variable dividend means the yield will change. Consequently, if you're seeking a consistent income stream, you may want to explore alternatives.
Additionally, there's the challenge associated with the Nasdaq-100. Although volatility can benefit an options strategy, it can be emotionally exhausting to own a volatile investment, especially if you're a conservative investor attempting to generate income to support retirement. The JP Morgan Nasdaq Tech Income ETF is a rather new ETF, and it followed the index it tracks just as closely in its initial stages. However, it began to rise along with the index afterwards. The graph below provides further insight.
Selling covered calls generally limits the upside, as investments that rise are called away. Thus, the advance of the JP Morgan Nasdaq Tech Income ETF hasn't been as significant as that of the index. However, its initial declines mirrored those of the index. In theory, selling covered calls should help mitigate drawdowns, but so far, this ETF hasn't proven that. If you're unable to endure the downturn and aren't satisfied with the upside potential, a large dividend yield may not be enough to keep you invested. Besides, you may sell at the worst possible time, since that's typically when the emotional toll of owning a lagging investment is highest.
The JP Morgan Nasdaq Tech Income ETF is an intriguing ETF
In conclusion, the verdict on the JP Morgan Nasdaq Tech Income ETF might still be pending as it hasn't accumulated a long performance record. The idea of combining a volatile technology-focused index with an options strategy is attractive. Despite its allure, this investment carries considerable risks for investors, including unpredictable dividends, limited upside potential, and undefined downside risk. It could be a good candidate to keep on your watchlist for a while longer.
- Despite the potential risks, the JP Morgan Nasdaq Tech Income ETF's active management strategy, which involves selling covered calls to generate revenue, could be an attractive option for investors seeking higher returns in the finance world of investing.
- Careful consideration of the risks, such as unpredictable dividends and limited upside potential, is crucial before investing in the JP Morgan Nasdaq Tech Income ETF, especially for conservative investors looking for a steady income stream in the realm of money management.
