High yield funds can be risky. In a perfect world, any ultra-generous dividend yield would be a direct result of strong companies generating lots of excess cash profits. In the real world, they are more often associated with low stock prices and companies in deep financial trouble. As a result, high interest rates are often accompanied by disappointing price charts and modest total returns at best.
What if I told you that one of the largest income-oriented Exchange Traded Funds (ETFs) on the market today is combining rich returns with impressive price gains? The JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) ticks both shareholder-friendly boxes – and more.
The Premium Income ETF is a very young fund, launched in May 2022. You may also have missed it in the vast sea of income-generating ETFs because it is an actively managed fund. Passive index funds tend to have lower annual fees, so it’s wise to start your fund screening process with that criterion.
But this JPMorgan The instrument could well be worth the 0.35% management fee. Here is a brief overview of the fund’s unique qualities:
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The Premium Income ETF’s experienced management team relies on data science to select high-income stocks from the growth-oriented equity markets. Nasdaq100 market index.
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Currently, 54% of the portfolio is invested in information technology and communications services – two market sectors closely linked to the ongoing artificial intelligence (AI) boom.
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The top 10 holdings include the entire list of “Magnificent 7” stocks – proven winners with very large market caps.
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Some of those tech giants don’t pay dividends, but the fund managers generate monthly income from them in other ways.
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The annual dividend yield currently stands at 9.3%, after rising above 12% in the summer.
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It has a massive $20.7 billion in assets under management, despite its short market history. Investors were quick to embrace this promising new fund:
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The dividend-boosting methods include some risky tricks, such as selling short-term call options to generate payments from volatile stocks. That’s great when it works, but it can also lead to poor fund performance And lower returns in a sustained market downturn.
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The fund was launched a few months before the start of this bull market. It has not yet been tested in a weak economy, which could unleash the downsides of options-based investing tactics.
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The 0.35% management fee may not seem like much, but it is well above the 0.06% average of today’s ten largest ETFs and even beyond that of low-cost funds like the Vanguard S&P 500 ETF (NYSEMKT:VOO). In fact, the compensation can make a big difference in the long run. The Vanguard fund’s 0.03% annual fee equates to 0.3% over ten years, while the Premium Income ETF’s fees would total 3.6% over the same period.
Option income generation results in a monthly dividend payment instead of the usual quarterly checks. You can call that an advantage or a disadvantage, depending on the payout rhythm you prefer.
The Premium Income ETF’s total returns since its launch in 2022 have matched broad market trackers like the Vanguard S&P 500 ETF. At the same time, the fund’s price rose only 28%, while the market tracker rose 46%. In other words, the fund remains reasonably priced even in a rare market boom, and you’re still guaranteed some incredible dividend payments for the long term.
Monthly payouts over the past year were $5.38 per share, or a 10.7% yield at the current share price of about $58. I can’t promise that the fund will increase its payouts forever, given its reliance on unconventional options-based techniques, but it might be useful to consider how a modest payout increase might play out over time.
Let’s imagine that the fund’s annual total return will hover around 10% for the next ten years – a pretty reasonable assumption for a fund that tends to match expectations. S&P500. I assume dividend payments will increase at a similar rate, resulting in a 159% increase over the next ten years.
You would still have a current yield of 9.3% at that point, but the same payout represents a 24% return on the original purchase price. If you’re looking for strong dividend payments twenty years from now, this fund can give you an effective return of 62% on an investment made in 2024.
This thought experiment is based on a lot of assumptions, but you get the idea. Even if the JPMorgan Nasdaq Equity Premium Income ETF were to underperform the S&P 500, it could emerge as a hyper-effective source of cash payouts over the long term. If you have $2,000 available today to start a position, this fund could pay dividends of almost $1,317 in 2044. That’s an effective return of 66%, although it could be higher or lower depending on how accurate my assumptions are.
At that point, the price per share no longer really matters. You would never sell any part of that powerful ATM unless it was absolutely necessary.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Anders Bylund holds positions in Vanguard S&P 500 ETF. The Motley Fool holds positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The Best High-Yield Dividend ETF to Invest $2,000 in Right Now was originally published by The Motley Fool
