High-yield funds can be risky. In a perfect world, every ultra-generous dividend yield would be a direct result of strong businesses generating lots of excess cash profits. In the real world, they’re more often related to low stock prices and businesses in deep financial trouble. As a result, high yields tend to be paired with disappointing price charts and modest total returns, at best.
What if I told you that one of the largest income-focused exchange-traded funds (ETFs) on the market today combines rich yields with impressive fund-price gains? The JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) checks both of those shareholder-friendly boxes — and many more.
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The Premium Income ETF is a very young fund, launched in May 2022. You may also have skipped it in the massive sea of income-generating ETFs because it’s an actively managed fund. Passive index funds tend to come with lower annual fees, so it makes sense to start your fund-screening process with that criterion.
But this JPMorgan instrument may be well worth its 0.35% management fee. Here’s a quick rundown of the fund’s unique qualities:
The Premium Income ETF’s experienced management team relies on data science to select high-income stocks from the growth-oriented Nasdaq 100 market index.
54% of the portfolio is currently invested in information technology and communication services — two market sectors closely related to the ongoing artificial intelligence (AI) boom.
The top 10 holdings include the entire list of “Magnificent 7” stocks — proven winners with very large market caps.
Some of those tech giants don’t pay dividends, but the fund managers generate monthly income from them in other ways.
Annual dividend yields currently stand at 9.3% after rising above 12% over the summer.
It has a massive $20.7 billion of assets under management, despite its short market history. Investors were quick to embrace this promising new fund:
JEPQ Total Assets Under Management data by YCharts.
The dividend-boosting methods include some risky tricks, such as selling short-term call options to generate payments out of volatile stocks. That’s great when it works, but could also result in weak fund performance and lower yields in a persistent market downturn.
The fund was launched a couple of months before this bull market started. It has not yet been tested in a weak economy, which could unleash the downsides of option-based investing tactics.
The 0.35% management fee may not look like much, but it’s far above the 0.06% average of the 10 largest ETFs today and even further ahead of low-cost funds such as the Vanguard S&P 500 ETF (NYSEMKT: VOO). The fee could actually make a big difference in the long run. The Vanguard fund’s 0.03% annual fee adds up to 0.3% in a decade, while the Premium Income ETF’s fees would total 3.6% over the same period.
The options-based income generation results in a monthly dividend payout instead of the usual quarterly checks. You can call that an upside or a downside, depending on which payout cadence you prefer.
The Premium Income ETF’s total returns have matched broad market trackers like the Vanguard S&P 500 ETF since its 2022 inception. At the same time, the fund price has only increased 28%, while the market tracker rose by 46%. In other words, the fund remains reasonably priced, even in a rare market surge, and you’re still locking in some incredible dividend payouts for the long run.
The monthly payouts added up to $5.38 per share over the last year, or a 10.7% yield against the current share price of approximately $58. I can’t promise that the fund will boost its payouts forever, given its reliance on unconventional options-based techniques, but it could be useful to consider how a modest payout increase could play out over time.
Let’s imagine that the fund’s annual total returns hover around the 10% mark over the next decade — a fairly reasonable assumption for a fund that tends to match the S&P 500. I would assume that the dividend payouts increase at a similar rate, which results in a 159% increase over the next decade.
You would still have a current yield of 9.3% at that point, but the same payout represents a 24% yield against the original purchase price. If you’re looking for strong dividend payouts 20 years down the road, this fund could give you an effective yield of 62% on an investment made in 2024.
This thought experiment relies on many assumptions, but you get the idea. Even if the JPMorgan Nasdaq Equity Premium Income ETF might underperform the S&P 500, it could grow into a hyper-effective source of cash payouts in the long term. If you have $2,000 available to start a position today, this fund could pay out dividends approaching $1,317 in 2044. That’s an effective yield of 66%, though it could be higher or lower depending on how accurate my assumptions are.
At that point, the price per share won’t really matter anymore. You’d never sell any part of that high-powered cash machine unless you absolutely had to.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Anders Bylund has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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