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 profits. In the real world, they are more often linked to low stock prices and companies in deep financial trouble. As a result, high returns tend to be associated with disappointing price charts and modest total returns, at best.
What if I told you that one of the largest exchange-traded funds (ETFs) focused on income in the market today combines rich yields with impressive gains in the price of the fund? U JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.83%) it checks both shareholder-friendly boxes – and much more.
Because this young income-oriented ETF is turning heads
The Premium Income ETF is a very young fund, launched in May 2022. You might as well have jumped into the massive sea of ETFs that generate income because it is 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 criteria.
But this JPMorgan tool can be well worth its management fee 0.35%. Here’s a quick rundown of the fund’s unique qualities:
The good:
- The experienced management team of the Premium Income ETF relies on data science to select high-income stocks from growth-oriented countries. Nasdaq 100 market index.
- 54% of the portfolio is currently invested in information technology and communication services – two market sectors closely linked to the artificial intelligence (AI) boom.
- The top 10 holdings include the full list of “Magnificent 7” stocks – proven winners with very large market capitalizations.
- Some of those tech giants don’t pay dividends, but fund managers generate monthly income from them in other ways.
- Annual dividend yields are currently at 9.3% after rising above 12% in the summer.
- 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:
JEPQ Total Assets Under Management data from YCharts.
The bad:
- Dividend boosting methods include some risky tricks, such as selling short-term call options to generate payouts from volatile stocks. It’s great when it works, but it could also result in a weak fund performance and lower returns in a persistent market downturn.
- The fund was launched a couple of months before the start of the bull market. It has not yet been tested in a weak economy, which could expose the downsides of option-based investment tactics.
- The management fee of 0.35% may not be much, but it is well above the 0.06% average of the 10 largest ETFs today and even ahead of low-cost funds such as the Vanguard S&P 500 ETF (VOO 1.03%). The fee could really make a big difference in the long run. The Vanguard fund’s 0.03% annual fee would add up to 0.3% over a decade, while the Premium Income ETF’s fees would total 3.6% over the same period.
Option-based income generation results in a monthly dividend payment instead of the usual quarterly checks. You can call it an upside or a downside, depending on the payment frequency you prefer.
How ETFs stack up against the S&P 500
The total return of the Premium Income ETF has matched broad market trackers such as the Vanguard S&P 500 ETF since its inception in 2022. At the same time, the fund’s price has increased only 28%, while the market tracker increased by 46%. In other words, the fund remains reasonably priced, even in rare market upswings, and you’ll still lock in some incredible long-term dividend payments.
JEPQ data from YCharts.
Long-term dividend yields
The monthly payments add up to $5.38 per share over the last year, or a yield of 10.7% against the current share price of about $58. I cannot promise that the fund will increase its payments forever, given its dependence on techniques based on unconventional options, but it could be useful to consider how a modest increase in payment could play out over time.
Let’s imagine that the fund’s annual total return hovers around the 10% mark over the next decade – a fairly reasonable assumption for a fund that tends to match S&P 500. I would expect dividend payments to increase at a similar rate, resulting in a 159% increase over the next decade.
You may still have a current yield of 9.3% at that point, but the same payment represents a yield of 24% against the original purchase price. If you are looking for strong dividend payments after 20 years, this fund could give an effective return of 62% on an investment made in 2024.
This thought experiment is based on several assumptions, but you get the idea. Even if the JPMorgan Nasdaq Equity Premium Income ETF could underperform the S&P 500, it could become a hyper-efficient source of long-term cash payouts. If you have $2,000 available to start a position today, this fund could pay dividends approaching $1,317 in 2044. That’s an effective return of 66%, although it could be higher or lower depending on how accurate my predictions are. assumptions.
At that point, the price per share doesn’t matter anymore. Never sell any part of that high-powered cash machine unless you absolutely have to.