J.P. Morgan Launches Its First ETF on the Nasdaq Exchange
J.P. Morgan Asset Management recently launched its first ETF on the Nasdaq Exchange. The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) seeks to deliver a consistent stream of distributable yield while also delivering a significant portion of the returns associated with the fund's primary benchmark, the Nasdaq-100 Index® (NDX®), with less volatility.
JEPQ is an actively managed portfolio that provides exposure to and resembles the NDX. The investment philosophy is to select securities of innovative large-cap companies that will likely outperform the NDX and will likely generate a modest amount of alpha based on a proprietary fundamental framework. At the same time, it avoids selecting stocks that have greater left tail risk or extreme downside performance periods. Investors receive the dividend associated with the long portfolio as well as the income generated from selling out-of-the-money options on the NDX. In addition, they may get some upside benefit when the market moves higher. The fund’s goal is to achieve a diversified source of return and consistent monthly distributable income, although the return is not guaranteed.
The call overwrite strategy, which is integral to JEPQ, involves selling call options on the NDX – not on individual names – with a strike price that is higher than the current level of the index. The assumption is that the options will not get exercised before they expire. However, investors need to understand what to expect from this strategy. Options premiums increase when volatility rises, so there is more potential for a higher level of income. Similarly, options premiums decrease when volatility falls, so the income might be slightly lower.
“Selling options does two things,” Hamilton Reiner, Portfolio Manager, Head of U.S. Equity Derivatives at J.P. Morgan Asset Management explains. “Over time, it reduces the overall beta profile of your entire strategy, and it gives you income.”
He believes that this type of strategy “could really shine” in today's rising rate and inflationary environment because it allows investors to continue to own stocks in a more conservative manner. But investors should keep in mind that over time they will give up some upside potential in return for an above average level of income plus a lower volatility beta profile.
“You can’t have your cake and eat it too,” he warns. “There’s a modest tradeoff.”
J.P. Morgan Asset Management has already tested this investment strategy. The firm launched the JPMorgan Equity Premium Income ETF (JEPI) in May 2020. That portfolio invests in S&P 500 stocks that exhibit low volatility and value characteristics and sells options on the stocks to generate income. Its goal is to achieve a balance of monthly distributable income and capital appreciation by buying defensive equities and selling call options on the SPX. JEPI has just under $9 billion in AUM, and according to Reiner, it is the fastest growing active equity ETF in the industry.
Investors are constantly in search of income and total return. This investment strategy provides the opportunity to leverage a liquid, transparent product to achieve a good total return over time in a multi-prong approach of dividends, options premium, and capital appreciation. Moreover, the fees are only 35 basis points.
“Call overwriting has grown significantly over the last couple years, and I expect it to continue to grow,” says Reiner. “I don’t view JEPQ as a competitor to JEPI. I view it as a complement in a growing category. I’m ecstatic to partner with the Nasdaq brain trust on this product. It’s a great group of people with a great platform.”
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