The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) and the Global X Nasdaq 100 Covered Call ETF (QYLD) ETFs are some of the most popular covered call funds in Wall Street.
QYLD, launched in 2013, has attracted over $8 billion while JEPQ has almost $16 billion in assets under management.
They have also done relatively well this year, with the JEPQ and QYLD rising by 14.3% and 11%, respectively. However, they have underperformed the Nasdaq 100 indices.
The rise of covered call ETFs
Covered call ETFs have done well in the last three years, helped by the rising demand for yield. While US government bonds are yielding over 5%, the QYLD fund yields about 11.2% while JEPQ has an annual return of 9.21%.
In addition to JEPQ and QYLD, other popular covered call ETFs are JPMorgan Equity Premium Income ETF (JEPI), which has over $35 billion in assets and Global X S&P 500 Covered Call ETF (XYLD), which has $2.8 billion.
In addition to higher dividend payouts, these funds have become popular because of their promise to reduce downside risk. However, as we saw in August, covered call ETFs did not have a better performance than other passive funds like those tracking the S&P 500 and Nasdaq 100 indices.
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
The JEPQ ETF is an ETF that aims to generate strong dividends and stock appreciation to its investors.
It is a modified version of the Nasdaq 100 index. According to its website, JEPQ has invested in 98 companies, mostly in the technology sector.
Its biggest constituents are companies like Apple, Microsoft, Nvidia, Amazon, and Meta Platforms. It has also invested in companies like Tesla and Netflix.
The main difference between JEPQ and popular Nasdaq 100 ETFs like QQQ and QQQM is that it employs options to generate returns.
After investing in these companies, the fund manager sells call options of Equity Linked Notes (ELNs) of the benchmark Nasdaq 100 index. A call option is a derivative that gives one an option to buy an asset at a certain price.
By investing in the 98 companies, the fund hopes to take advantage of its uptrend. This is notable since the Nasdaq 100 index has been in a bull run for decades as it jumped from less than $50 on its inception to almost $20,000 today.
The options part is useful because it lets the fund generate income. It does this by receiving a premium when it implements a call option trade. It then distributes these funds to its investors.
Assume that the Nasdaq 100 index was trading at $20,000 and you have a call option. In this case, if the index falls to $18,000, then the options trade becomes worthless since you can buy it at the lower price.
The upside risk for this trade is if it hits the strike price and then continues rising. When this happens, you miss the upside.
In the past three years, the JEPQs total return was 35.7% while the QQQ rose by 28%. However, this year, it has returned 14.3% while QQQ has risen by 16%.
The Nasdaq 100 Covered Call ETF (QYLD)
The Nasdaq 100 Covered Call ETF is another similar ETF for dividend investors. It invests about 80% of its funds in companies in the CBOE NASDAQ -100 BuyWrite V2 Index. This index is made up of companies like Apple, Microsoft, Nvidia, Broadcom, and Amazon.
The fund then sells call options on the index each month. In this, the exercise price is usually higher than the current indexe’s price and is held until one day prior to the expiration date, which is often on Thursdays.
The fund has done well since its launch in 204. It has had eight years of positive returns and only 2 negative ones. Its best annual performance was in 2019 when the fund returned 23%. On the other hand, its worst annual performance was in 2022 when it dropped by 19% as the Nasdaq 100 index fell by 32%.
As a result, the Nasdaq 100 total return in ten years to 2023 was 55% compared to the QYLD’s 22.8%.
QYLD vs QYLD ETF: better buy?
As I have written before, and as the WSJ wrote recently, these boomer candy ETFs tend to underperform the benchmark indices in the long term. As such, it makes sense to invest in passive funds like the Vanguard S&P 500 (VOO) and the Invesco Nasdaq 100 ETF (QQQM).
QYLD has a dividend yield of 11% while JEPQ has 9.5%. Still, based on the past performance, as shown above, there are signs that JEPQ is a better fund. For example, JEPQ returned 36% in 2023 as the QQQ fund gained by 54%. In the same period, the QYLD fund returned 22%. Also, JEPQ is much cheaper, with an expense ratio of 0.35% compared to QYLD’s 0.61%.
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