The JPMorgan Equity Premium Income ETF (JEPI) and JPMorgan Nasdaq Equity Premium ETF (JEPQ) had a strong performance in 2023 in terms of assets. JEPI’s total assets surged by over $12 billion and hit $30 billion.
JEPQ, on the other hand, had over $6.6 billion in inflows, bringing its total assets to over $8.3 billion. This trend happened as investors moved to active ETFs with high dividend yields and monthly payments.
JEPQ has a yield of about 10.3% while JEPI yields 8.6%, higher than other traditional ETFs like SPY and QQQ. In a year when interest rates jumped to their highest level in over two decades, receiving these yields was seen as a positive move.
For starters, JEPI and JEPQ are some of the biggest active ETFs offered by JPMorgan, the biggest American bank with over $3.7 trillion in assets. These funds use a strategy known as a covered call.
The strategy is fairly simple to understand, especially when you know options trading. In this case, the ETF manager buys an underlying asset and then sells call options on the same. By just doing that, the manager receives a premium, which it distributes to its holders.
Covered calls are ideal for hedging purposes. If the asset’s price drops, the options trade becomes worthless since the counterparty can buy the asset in the open market. But the asset manager still makes money in the form of the premium.
On the other hand, if the price rises, the ETF makes money in both the premium and the price movement. JEPI’s prospectus adds that:
“ELNs in which the Fund invests are derivative instruments that are specially designed to combine the economic characteristics of the S&P 500 Index and written call options in a single note form and are not traded on an exchange.”
JEPI and JEPQ investors have two primary goals. First, they aim to generate strong monthly returns. Second, they aim to outperform the key indices like S&P 500 and Nasdaq 100.
In this case, a closer look at their total returns shows that investing in generic ETFs like the SPDR S&P 500 (SPY) and Invesco QQQ was a better option. As shown above, JEPI and JEPQ total returns in 2023 stood at 9.71% and 36.70%.
In the same period, SPY and QQQ rose by 27% and 56%. This performance also happened in other similar active ETFs. As I wrote on Tuesday, the YieldMax TSLA Option Income Strategy ETF (TSLY) underperformed Tesla by a wide margin. Similarly, the Neos S&P 500 Income ETF (SPYI) lagged behind the S&P 500.
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