Option income ETFs have been gaining immense popularity this year amid heightened volatility and uncertainty. This is especially true as JPMorgan Nasdaq Equity Premium Income ETF JEPQ made it to the top 10 ETF inflows list, pulling in $5.7 billion in new money year to date. Its sister fund, JPMorgan Equity Premium Income ETF JEPI, has added another $3.5 billion over the same period.
Growing Assets
Just three years after its debut, JEPQ oversees more than $24 billion in assets while JEPI, launched in 2020, has grown even larger, amassing nearly $39 billion. Together, the two funds have become the cornerstones of a fast-growing category of ETFs that use options overlay strategies to generate consistent income for investors.
Why Option Income ETFs?
Option income ETFs typically employ covered call strategies, where the fund holds a portfolio of stocks and sells call options on those holdings to generate income. The premiums collected from selling these options are then distributed to shareholders in the form of dividends. The trade-off is that while this strategy generates cash flow, it can cap the fund's upside potential because the call options may limit gains when underlying stocks rally strongly.
JEPI vs. JEPQ
Both JEPI and JEPQ employ covered call strategies — selling call options on top of a stock portfolio to generate income in the form of option premiums.
JEPI generates income through a combination of selling options and investing in U.S. large-cap stocks. It seeks to deliver a monthly income stream from associated option premiums and stock dividends. It takes a complex route by using equity-linked notes (ELNs), which are structured debt instruments tied to the returns of an S&P 500 covered call strategy. Up to 20% of JEPI’s portfolio is allocated to these ELNs, with the remainder invested in a basket of low-volatility, value-oriented U.S. stocks. The fund also incorporates ESG criteria in its stock selection process (read: 5 Best Stocks of the S&P 500 ETF in the Past Month).
JEPQ applies a similar strategy to the tech-heavy Nasdaq-100. It generates income through a combination of selling options and investing in U.S. large-cap growth stocks and seeks to deliver a monthly income stream from associated option premiums and stock dividends. Like JEPI, it uses ELNs to mimic a covered call approach and distributes income on a monthly basis. The fund aims to deliver high yield and lower volatility compared to its benchmark (read: 5 Stocks That Powered Nasdaq ETF's Outperformance Last Week).
Performance
Since its 2020 launch, JEPI has returned approximately 70%, outperforming its peers like the Global X S&P 500 Covered Call ETF XYLD, which gained 56% in the same period. While JEPI’s performance trails the returns of 107% for SPDR S&P 500 ETF Trust SPY, it aligns closely with the returns of iShares MSCI USA Min Vol Factor ETF USMV.
JEPQ has returned 44% since its launch in 2022, handily beating the 20% gain of the Global X Nasdaq 100 Covered Call ETF QYLD. However, it still trails the 57% return of the Invesco QQQ Trust QQQ, which tracks the Nasdaq-100 without any options overlay.
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Invesco QQQ (QQQ): ETF Research Reports SPDR S&P 500 ETF (SPY): ETF Research Reports iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports Global X Nasdaq 100 Covered Call ETF (QYLD): ETF Research Reports JPMorgan Equity Premium Income ETF (JEPI): ETF Research Reports JPMorgan Nasdaq Equity Premium Income ETF (JEPQ): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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