If you have $10,000 available, this special Nasdaq ETF could potentially generate around $1,000 in annual income for you.
The Nasdaq-100 Index primarily focuses on growth stocks, featuring the top non-financial entities listed on the Nasdaq stock exchange. This growth emphasis has led the index to surpass the investment returns of the S&P 500 by over doubling its performance over the past 15 years.
However, one downside of the Nasdaq-100 is its limited income generation, with a dividend yield currently hovering at 0.8%. But fear not, as there's a solution that allows you to have your cake and eat it too.
Enter the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ with a 0.84% expense ratio). This innovative exchange-traded fund (ETF) offers lower-volatility exposure to the Nasdaq-100, along with a steady income stream. Let's explore how a $10,000 investment in this ETF could generate approximately $1,000 in annual income.
A Rich Source of Income
The JPMorgan Equity Premium Income ETF employs a two-pronged investment strategy:
- Equity portfolio: The fund's managers employ data science and fundamental analysis to create an equity portfolio.
- Disciplined options strategy: The ETF sells out-of-the-money call options on the Nasdaq-100 Index, generating a monthly income stream.
The ETF's strategy of selling call options yields a significant income. By selling Nasdaq-100 Index calls, it collects income from options premiums. The option premium is the cost paid by the buyer to the seller. As an options seller, the ETF retains 100% of this income if the option expires worthless. The income fluctuates due to the changing premiums, as options premiums are typically higher during more volatile periods.
This ETF's call options strategy is highly profitable: Its latest monthly distribution boasted an annualized yield of 12.4%. Over the previous 12 months, the yield reached 9.9%. This yield is significantly higher than other high-yielding asset classes, such as high-yield U.S. bonds (currently yielding around 7%) and REITs and 10-year Treasury bonds (both below 4%).
To put the ETF's yield into perspective, a $10,000 investment would yield approximately $990 in annual income based on its trailing-12-month rate. Compare this to only $80 in dividend income from a similar investment in a Nasdaq-100 ETF like the Invesco QQQ Trust.
Equity Market Upside Exposure
Inline with income generation, this ETF provides equity market exposure by investing in a diversified portfolio of high-quality stocks. Its top holdings include prominent Nasdaq-100 companies such as noteworthy tech giants Nvidia (with a 7.7% allocation), Apple (7.2%), and Amazon (4.6%).
The ETF's managers actively manage the portfolio for optimal risk-adjusted returns. For instance, it didn't hold shares of vaccine developer Moderna in the third quarter, which contributed positively to its performance due to the stock's underperformance during the period in response to concerns around some of Moderna's products and pipeline. The fund had a higher allocation to Oracle, which boosted its returns in the third quarter after the cloud giant released long-term targets ahead of expectations.
This ETF's dual strategy yields both a consistent income stream and equity market appreciation as the value of the underlying portfolio increases. Consider the hypothetical returns for a $10,000 investment made at the fund's inception in May 2022:
As the chart illustrates, our hypothetical investor has accumulated approximately $3,500 in income, while their initial investment has grown by around 10% to $11,000. In total, the investor has realized a return of 43% (15.3% annually), providing a lucrative combination of income and growth.
Incorporating the strategy mentioned, an individual who invests $10,000 in the JPMorgan Nasdaq Equity Premium Income ETF could potentially earn around $990 in annual income based on its trailing-12-month rate. This is significantly more than the $80 in dividend income from a similar investment in a Nasdaq-100 ETF like the Invesco QQQ Trust.
For those seeking to diversify their investments and generate a steady income stream, the JPMorgan Equity Premium Income ETF presents an attractive option, offering lower-volatility exposure to the Nasdaq-100 while maintaining equity market appreciation potential.
[Note: This information should not be used to make investment decisions. Always conduct thorough research or consult a financial advisor before investing.]
