The Nasdaq-100 Index is all about growth stocks -- it holds the top nonfinancial stocks listed on the Nasdaq stock exchange. That growth focus has enabled the index to deliver superior investment returns: It has more than doubled the return of the S&P 500 over the last 15 years.
If there's one drawback to the Nasdaq-100, it's that it doesn't produce much income (the index's dividend yield is currently 0.8%). However, there is a way to have your proverbial cake and eat it too.
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The JPMorgan Nasdaq Equity Premium Income ETF(NASDAQ: JEPQ) offers lower-volatility exposure to the Nasdaq-100, and monthly income. Here's a look at how this unique exchange-traded fund (ETF) can turn a $10,000 investment into roughly $1,000 of income each year.
Underlying equity portfolio: The fund's managers use data science and fundamental research to construct an equity portfolio.
Disciplined options overlay strategy: The ETF writes out-of-the-money call options on the Nasdaq-100 Index to generate distributable income each month. (Out-of-the-money call options are above the current market price.)
The fund's strategy of writing options generates a lot of income. It writes (sells) call options on the Nasdaq-100 Index, enabling it to collect income from options premiums. An option premium is the price paid by the option buyer to the seller. As an options seller, the ETF gets to keep 100% of this income if the option expires worthless. That income fluctuates because options premiums are higher during more volatile periods.
The fund's strategy of writing calls on the Nasdaq-100 index is very lucrative: Its last monthly distribution had an annualized yield of 12.4%. Over the last 12 months, the yield is 9.9%. That's much higher than other high-yielding asset classes. For example, high-yield U.S. bonds have a yield of around 7% right now, while real estate investment trusts (REITs) and 10-year Treasury bonds are below 4%.
To put this ETF's yield into perspective, a $10,000 investment would produce about $990 of annual income at the trailing-12-month rate. That compares to only $80 of dividend income on a similar investment in a Nasdaq-100 ETF like Invesco QQQ Trust.
Equity market upside exposure
Income is only part of the return generated by this ETF. It also offers equity market exposure by holding a portfolio of high-quality stocks. Its top holdings include notable Nasdaq-100 names Nvidia (7.7% allocation), Apple (7.2%), Amazon (4.6%), and other well-known technology and consumer companies.
The fund doesn't have a matching allocation to the Nasdaq-100. The ETF's managers actively allocate the portfolio for optimal risk-adjusted returns. For example, it didn't hold shares of vaccine giant Moderna in the third quarter; that added to its results because the stock underperformed during the period due to concerns about some of Moderna's products and pipeline. The fund had a higher weighting on Oracle, which boosted its results in the third quarter after the cloud giant provided long-term targets well ahead of expectations.
The ETF's dual strategy enables investors to both generate income and capture some value appreciation as the underlying portfolio's value increases. Here's a look at what would have happened to a $10,000 investment made at the fund's inception in May 2022:
As that chart shows, our hypothetical investor has collected about $3,500 in income. Meanwhile, their initial investment has grown by about 10% to $11,000. Add it up, and the total return is 43% (15.3% annualized). That's a strong total return from a fund offering meaningful income and lower volatility.
Income and more
JPMorgan Nasdaq Equity Premium Income ETF can provide you with a very lucrative monthly income stream from options premiums. For additional return potential, the fund offers less volatile equity-market exposure to the top stocks in the Nasdaq-100. These features can make it a great ETF to generate passive income while continuing to grow your wealth.
Should you invest $1,000 in JPMorgan Nasdaq Equity Premium Income ETF right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matt DiLallo has positions in Amazon, Apple, JPMorgan Nasdaq Equity Premium Income ETF, and Moderna and has the following options: short February 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Amazon, Apple, Nvidia, and Oracle. The Motley Fool recommends Moderna and Nasdaq. The Motley Fool has a disclosure policy.
