The Nasdaq-100 has delivered superior performance over the years. The index features the top 100 non-financial stocks listed on the Nasdaq exchange. It has delivered a 17.8% annualized total return over the last decade, significantly outperforming the S&P 500‘s 10.8% annualized total return.
The index does have some drawbacks, as it’s more tech-heavy and tends to be more volatile. However, investors can cash in on its volatility, and upside potential, through a unique exchange-traded fund (ETF): JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). It could potentially turn a $1,000 investment into a load of passive income while also growing in value.
A dual strategy to deliver on its ambitious mandate
The JPMorgan Nasdaq Equity Premium Income ETF has a rather bold objective. It aims to deliver monthly distributable income to investors and equity exposure to the Nasdaq-100 with less volatility. The actively managed fund uses a two-pronged strategy to achieve its goal:
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Equity portfolio: The fund’s managers use an applied data science approach and fundamental research to build an optimal portfolio of Nasdaq-100 stocks.
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Options overlay strategy: The fund writes out-of-the-money call options on the Nasdaq-100 index to generate income.
The fund’s equity portfolio features most of the stocks listed in the Nasdaq-100 index. However, it doesn’t have the same allocations, which can positively and negatively affect returns.
For example, the fund outperformed the Nasdaq-100 in the first quarter because of a higher weighting to Nvidia, which is benefiting from AI-powered demand for its semiconductors, and a lower weighting to Intel, which has fallen behind its rival in the semiconductor industry. That helped offset the drags from underweighting the high-performing Applied Materials and overweighting the lackluster-performing Analog Devices in the period.
The other leg of the fund’s strategy is writing call options on the Nasdaq-100 index for income. This strategy enables it to profit from volatility because higher volatility increases options prices. The fund’s last income payment came in at a nearly 9.6% yield. That’s significantly higher than other asset classes. Meanwhile, the income yield over the past year has been over 10%. That implies a $1,000 investment would generate about $100 in annual income.
Upside and income with less volatility
This ETF aims to provide several benefits for investors compared with buying an ETF focused on the Nasdaq-100 like the Invesco QQQ Trust. That fund provides uncapped equity upside exposure to 100 of the fastest-growing non-financial stocks listed on the Nasdaq exchange. It’s best for those seeking growth above all else, since it offers high upside potential. However, downsides include limited income — its dividend yield is around 0.6% — and higher volatility than the S&P 500. Those features probably make it less appealing to those in or nearing retirement or who are more risk-averse.
The JPMorgan Nasdaq Equity Income ETF aims to address those two issues. It does that through active portfolio management, to optimize its allocation to the highest-performing Nasdaq-100 stocks, and through writing call options to generate income.
The options overlay strategy allows the fund to generate meaningful income each month to distribute to investors. Those payments vary from month to month because of volatility; options premiums are higher during periods of elevated volatility. However, over the past year, they’ve added up to more than a 10% yield. This income helps cushion the blow of volatility by providing investors with a real cash return each month that rises as volatility increases. That combination of income and lower overall volatility makes this fund a better option for those closer to, or in, retirement, or who prefer to avoid highly volatile investments.
A potentially better way to invest in the Nasdaq
The Nasdaq-100 index has delivered robust returns over the years, easily outpacing the S&P 500. However, it’s more volatile because of its focus on faster-growing tech stocks. It also doesn’t provide much dividend income.
The JPMorgan Nasdaq Equity Premium Income ETF aims to solve those issues by writing call options on the index. While that caps its upside potential, it helps mute downside volatility while also providing a generous monthly income stream. It can be a great alternative to investing in a Nasdaq-100 ETF. It could also turn a $1,000 investment into an attractive income stream while growing in value as the stocks in the Nasdaq-100 rise.
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Matt DiLallo has positions in Intel and JPMorgan Nasdaq Equity Premium Income ETF and has the following options: long January 2025 $30 calls on Intel and short January 2025 $30 puts on Intel. The Motley Fool has positions in and recommends Applied Materials and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Got $1,000? Here’s 1 Unique ETF to Cash In on the Nasdaq. was originally published by The Motley Fool
