The Nasdaq-100 Index is all about growth stocks – it contains the best non-financial stocks listed on the stock exchange Nasdaq fair. This growth focus has ensured that the index can deliver superior investment returns: the return of the index has more than doubled S&P500 over the past 15 years.
If there’s one downside to the Nasdaq-100, it’s that it doesn’t generate 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) provides lower volatility exposure to the Nasdaq-100, And monthly income. Here’s how this unique exchange-traded fund (ETF) can turn a $10,000 investment into about $1,000 in income every year.
The JPMorgan Equity Premium Income ETF has a two-pronged investment approach:
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Underlying equity portfolio: The fund’s managers use data science and fundamental research to build a stock portfolio.
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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, allowing it to generate income from option premiums. An option premium is the price that the option buyer pays to the seller. As an option seller, the ETF gets to keep 100% of this income if the option expires worthless. That income fluctuates because option premiums are higher during more volatile periods.
The fund’s strategy of writing calls on the Nasdaq-100 index is very lucrative: the last monthly distribution had an annualized return of 12.4%. Over the past 12 months, the return is 9.9%. That is much higher than other high-yield asset classes. For example, high-yield U.S. bonds currently yield around 7%, while real estate investment trusts (REITs) and 10-year government bonds yield below 4%.
To put this ETF’s returns into perspective, a $10,000 investment would produce approximately $990 in annual income at a twelve-month interest rate. That compares to just $80 in dividend income on a comparable investment in a Nasdaq-100 ETF such as Invesco QQQ Trust.
Income is only part of the return this ETF generates. It also provides exposure to the stock market by holding a portfolio of high-quality stocks. The top positions 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 does not have a matching allocation to the Nasdaq-100. The ETF’s managers actively allocate the portfolio for optimal risk-adjusted returns. For example, it did not own any shares in the vaccine giant Modern in the third quarter; that contributed to the results as the stock underperformed during the period due to concerns about some of Moderna’s products and pipeline. The fund had a higher weighting Oraclewhich boosted its third-quarter results after the cloud giant presented long-term targets that were well above expectations.
The ETF’s dual strategy allows investors to both generate income and realize some appreciation as the value of the underlying portfolio increases. Here’s a look at what would have happened with a $10,000 investment made at the fund’s inception in May 2022:
As the chart shows, our hypothetical investor has collected approximately $3,500 in income. Meanwhile, their initial investment has grown by about 10% to $11,000. Add this up and the total return is 43% (15.3% annualized). That’s a strong total return from a fund that offers meaningful income and lower volatility.
JPMorgan Nasdaq Equity Premium Income ETF can provide you with a very lucrative monthly income stream from option premiums. For additional return potential, the fund offers less volatile stock market exposure to the top Nasdaq-100 stocks. These features can make it a great ETF to generate passive income while continuing to grow your wealth.
Before buying shares in the JPMorgan Nasdaq Equity Premium Income ETF, consider the following:
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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 holds positions in and recommends Amazon, Apple, Nvidia, and Oracle. The Motley Fool recommends Moderna and Nasdaq. The Motley Fool has a disclosure policy.
Do you have $10,000? This unique Nasdaq ETF could generate about $1,000 in income every year. was originally published by The Motley Fool
