JEPQ is a popular income ETF from J.P. Morgan that utilizes covered call options to pay monthly distributions. I review it here.
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Introduction – What Is JEPQ and How Does It Work?
JEPQ is the JPMorgan Nasdaq Equity Premium Income ETF. If you’ve read my review of JEPI, this post will feel very familiar. JEPQ is essentially the same strategy applied to a different benchmark, so naturally, this blog post will be very similar commentary. Whereas JEPI operates on the S&P 500, JEPQ is based on the Nasdaq-100 Index, which is the technology-heavy index of the 100 largest non-financial companies listed on the Nasdaq exchange.
JEPQ launched in May, 2022, and has since amassed over $34 billion in assets under management, making it one of the largest covered call ETFs on the market. This makes sense, as U.S. large cap tech has soared in recent years, drawing more people to the Nasdaq 100.
In a nutshell, JEPQ holds a basket of stocks drawn from the Nasdaq-100, selected using a proprietary “data science” process and ESG criteria, and then sells covered call options on that basket to generate income. The fund’s stated objective is to provide monthly income and participate in some of the upside of the Nasdaq-100, with lower volatility than the index itself. It charges an expense ratio of 0.35%.
The call options JEPQ writes are slightly out-of-the-money (OTM), meaning the fund does leave a small amount of room to capture some upside before the cap kicks in. As of 2024, managers also now stagger the one-month calls into multiple weekly buckets, diversifying across expiration dates and strike prices. This is a slightly more nuanced implementation than the at-the-money approach used by somewhat simpler funds like QYLD.
We’d certainly call JEPQ a “covered call fund,” but It’s arguably worth briefly clarifying that JEPQ doesn’t directly write call options explicitly. Instead, it utilizes Equity Linked Notes, or ELNs for short, which are structured instruments issued by a counterparty bank that have a covered call strategy embedded within them. The ultimate economic and mechanistic effects are functionally the same as straightforwardly writing covered calls, but I’d be remiss not to mention that the use of ELNs technically adds a layer of credit risk that a straightforward covered call fund wouldn’t have.
The Nasdaq-100 is more volatile than the S&P 500 by a meaningful margin, which is a bit of an oxymoron considering buyers of covered call funds often reflexively claim they’re aiming to lower volatility. But this actually works in JEPQ’s favor in terms of higher underlying volatility commanding higher option premiums on covered calls, which, all else equal, translates to more income generated.
As a result, JEPQ’s distribution yield tends to sit a littler higher than JEPI’s, often in the 9-12% range. That eye-catching yield is a big, if not the biggest reason why this fund is so popular.
Next we’ll more specifically break down the comparison to its older brother JEPI.
JEPQ vs. JEPI
JEPQ and JEPI share the same manager, the same basic strategy, and the same fee of 0.35%. The key differences come down to the underlying index and the resulting risk/return profile.
As mentioned previously, JEPI is built around the S&P 500, a broad index of 500 U.S. large cap stocks. JEPQ is built around the Nasdaq-100, which is a narrower, more concentrated index with a massive tilt toward large-cap growth stocks, particularly big tech names like Apple, Microsoft, Nvidia, Amazon, Meta, and Alphabet. Such stocks have done extremely well in recent years, hence the flocking to Nasdaq-oriented funds like JEPQ and QQQ.
To briefly mention it again, the higher volatility of the Nasdaq 100 generates larger option premiums, which means more “income.” So all else equal, JEPQ should yield more than JEPI in most environments, and historically it has.
The obvious other side of that coin is that the Nasdaq-100 is far less diversified. You’re essentially concentrating in U.S. large cap Growth, which has carried sky-high valuations and has faced real headwinds when factor investing tailwinds rotate elsewhere. Again, such concentration has proved fruitful in recent years, but that hasn’t always been the case, and almost certainly won’t always be the case in the unknowable future.
Both funds use ELNs rather than direct options writing, which means both carry the same added counterparty/credit risk. Neither fund’s distributions are qualified dividends; they’re taxed as ordinary income.
JEPI launched a couple years earlier in 2020 and has about $43 billion in assets.
Next we’ll look at JEPQ versus its underlying index fund QQQ.
JEPQ vs. QQQ
Let’s look at another salient comparison: how JEPQ performs against just owning the plain Nasdaq-100 Index via something like QQQ or QQQM.
Again, JEPQ basically holds the Nasdaq 100 and writes calls on it, so you can sort of think of it as QQQ already being inside JEPQ, and a little bit of the space is dedicated to the option writing via ELNs with covered call mechanics baked in.
Since its inception in May 2022 through Q1 of 2026, there’s no denying JEPQ has delivered pretty solid numbers in isolation; its total return including dividends has been around 14% annualized since inception. However, the plain Nasdaq-100 itself has dramatically outperformed that over the same period on CAGR alone.
Interestingly, they’ve had basically the same risk-adjusted return as measured by Sharpe and Sortino, but the underlying QQQ slightly edged out JEPQ on Calmar, the ratio of return to max drawdown, which is actually probably my favorite risk-adjusted return metric.
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One bright stretch for JEPQ came in the fund’s early days from its May 2022 inception through December 2022 – a period of sustained market decline when JEPQ outperformed the Nasdaq-100 by about 5.6 percentage points. That’s exactly what you’d expect. When the market is declining modestly or moving sideways, the option premium collected provides a small cushion to stay afloat. When the market is ripping upward, the covered call cap hurts. And when the market drops steeply, the option premium doesn’t provide much protection.
This tells us something important about who JEPQ is actually suitable for. The fund’s volatility since inception has been about 14% annualized, compared to approximately 20% for the Nasdaq-100 Index itself. So you are indeed getting lower volatility, which is the stated goal. But as with JEPI and QYLD, the risk-adjusted returns still don’t look particularly compelling once you account for the capped upside. There’s a reason analysts have noted that covered calls provide income by forgoing the upside of the underlying index – it’s just the mechanical reality of how covered calls work, which uninformed buyers often seem to miss.
I’d also point out the elephant in the room: the Nasdaq-100 is objectively a poorly diversified index. It’s predominantly large-cap growth, it excludes Financials entirely, and it’s heavily concentrated in a handful of mega-cap tech companies. I’ve noted before in the context of QYLD that concentrating in the Nasdaq-100 because of recent performance is largely a recency bias play. Large-cap growth has looked expensive relative to historical norms for years now.
JEPQ inherits all of that concentration risk and then layers on the additional complexity and upside limitations of the covered call strategy on top of it.
Is JEPQ a Good Investment?
So is JEPQ a good investment? Probably not.
If you didn’t pick up on it already, covered calls are just plainly not an efficient or effective way to de-risk a portfolio or provide sustained “income.”
That’s not an issue with the fund’s implementation. The covered call strategy embedded in JEPQ does exactly what it claims it will do. It reduces volatility relative to the benchmark, generates monthly income in the form of call option premiums, and provides a small cushion in flat or mild downward markets.
As I hinted at earlier, the issue is simply the inescapable mechanics of covered calls themselves. They’re capping upside but leaving nearly the same downside risk as the underlying equities index, introducing an appreciably asymmetric returns distribution. This alone should make your spidey sense tingle and is a red flag for anyone versed on such trades.
Basically, to word this in a different way that hopefully drives the point home, in explosive bull markets, which the Nasdaq-100 is historically prone to, JEPQ lags the NDX badly, and in flat or moderately declining markets, JEPQ fares only slightly better than the NDX. That is not a prediction, but simply a mathematical certainty.
And then we can confirm that theoretical underpinning by simply glancing at some backtests, even over short periods, in which the covered call fund in question almost always lags its underlying even on a risk-adjusted basis, much less a more broadly diversified portfolio across multiple assets (see below).
J.P. Morgan markets JEPQ as generating income without duration risk or credit risk of fixed income, but this is a silly marketing gimmick, as in this context we’d be using bonds as a bona fide diversifier to mitigate stock drawdowns, for which they tend to do a much better job than call options. Even if you hate bonds, T-bills will still probably yield superior results. I showed as much in my post on QYLD.
Sadly, JPM’s gimmicky framing has resonated with people in recent years when bonds haven’t done so well, but people are often mistakenly looking at bonds in isolation rather than in the context of a diversified portfolio alongside stocks. Two different things. In any case, equity call option premiums are certainly not a replacement for bonds. We’re still talking equity risk here.
The irony is naive buyers often solely focus on that juicy yield and ignore the rest, not realizing they could likely achieve demonstrably superior outcomes – less risk, more stability, and more “income” – using simpler, cheaper products. Don’t forget JEPQ costs 0.35%, over double its underlying QQQM at 0.15%.
I say it all the time: as usual, total return and the risk you’re taking to get it are all that matters at the end of the day, even for the so-called “income” investor.
Novice buyers of these complex, high-fee, high-yield funds will focus on and celebrate that large distribution yield while ignoring the overall behavior of the investment and how it relates to their overall portfolio. It’s quintessential mental accounting bias. It’s like paying $100 for a lottery ticket and being excited that you won $10.
For a young accumulator who is simply reinvesting the distributions, JEPQ makes even less sense. The math is straightforward. If you don’t need that monthly income to pay your bills, you’re just getting taxed on hefty distributions and then reinvesting the after-tax amount, creating a not-so-insignificant drag, all while capping the upside of the investment. That investor would be better off in a plain-vanilla Nasdaq-100 fund, or probably better, a broader total market index fund. A nominal 10% yield in a 32% tax bracket becomes roughly 6.8% after taxes.
The income investor who actually needs that regular cash flow every month — say, a retiree who is spending down the portfolio and wants predictable monthly distributions — definitely has a more legitimate case for a fund like this, but even she can almost certainly do better. Remember the small option premium is doing basically nothing to save you in a market crash, which retirees should be more concerned about, as withdrawals aren’t being replenished.
Notice how diversifying across multiple assets tends to produce demonstrably superior outcomes across the board, and this is even only looking at merely 4 years since JEPQ launched!
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Allow me to expand on that risk characteristic in more detail, since it warrants explaining. Simply put, despite erroneous claims from dividend bros shilling products like this on social media, covered calls do not protect the downside. Period.
I see this bogus claim about JEPQ, JEPI, QQQI, QYLD, etc. everywhere, and it’s simply not true in any meaningful sense. Proponents see lower volatility and a slightly smaller drawdown than the underlying and exclaim “Look! It has dOwNsIdE pRoTeCtIoN!”
But it only lowers such risk measurements only slightly, by precisely the amount of the option premium received. And there’s the rub. Remember I said JEPQ basically holds the NDX and then dedicates some space to the covered calls. That’s why JEPQ will always drop the same amount as the underlying minus precisely the amount of the call option premium.
Put another way, the option premium received provides only a small cushion. It does not provide any semblance of robust resiliency. It does not prevent JEPQ from falling sharply when the Nasdaq-100 crashes.
Anyone holding JEPQ for “downside protection” has misunderstood the product. If downside protection is the goal, as again it may very well be for the risk-averse investor or retiree, we’d look elsewhere to structurally uncorrelated assets like bonds and gold, or even OTM puts with something like CAOS, to hold alongside stocks.
Over some short period of sideways market movement, which is itself a pretty rare occurrence, covered calls may warrant some small inclusion in the portfolio. The issue is that over any reasonably long period, the aforementioned asymmetry of returns compounds. Increasingly more upside is capped, and increasingly more downside is left exposed. And we’ve already seen this in just a few years since JEPQ’s launch!
Remember we’re usually investing in the market at all because we expect it to go up more than it goes down. The covered call fund like JEPQ still relies on this assumption, but intrinsically mutes its effect to the detriment of the investor.
One last thing worth noting that people also seem to forget is that JEPQ’s distribution yield is not fixed. It fluctuates with market volatility, since higher volatility environments produce richer option premiums. In calm, steadily climbing markets, premiums compress and yields decline. If you’re counting on JEPQ’s current yield as a planning assumption going forward, you may be in for a surprise in a low-volatility bull market. You’re also likely in for a surprise with the tax bill if you’re only used to qualified dividends.
In the interest of full disclosure, if you couldn’t tell, I’m not a covered call fund investor and I’m not a dividend investor generally. I’d rather own a broadly diversified basket of low-cost index funds and simply sell shares as needed for income. I understand the psychological appeal of a regular cash deposit hitting your account every month, but mathematically, it’s largely the same and is usually inferior due to the aforementioned tax drag. I can set up the brokerage to sell shares for me automatically and create my own “dividend” when and how I want, and I do.
Or, to scratch the itch, maybe include JEPQ as a small percentage of the portfolio but not the whole thing, basically making it an “income sleeve” of sorts. Portfolios don’t have to be all-or-nothing. In that sense, you’d arguably be diversifying your diversifiers by adding an option writing overlay to an otherwise traditional portfolio. That is, for a hypothetical example, you could hold the NDX via QQQM, some T-bills, some gold, and a dash of JEPQ, and have a well-diversified setup.
I’d encourage anyone to get away from this fanciful idea that you must own a high-yield product with “income” in the name if you need income. It would be comical at this point if it weren’t so concerningly pervasive.
If for some reason you still want JEPQ, it should be available at any major broker, including M1 Finance, which is the one I tend to suggest around here.
What do you think of JEPQ? Do you own it? Let me know in the comments.
JEPQ FAQ’s
Lastly, here are some frequently asked questions about JEPQ and their answers.
When does JEPQ pay dividends?
JEPQ pays dividends monthly.
JEPQ launched on May 3, 2022.
How does JEPQ make money?
JEPQ uses ELN’s (Equity Linked Notes) with a covered call strategy baked in to effectively write call options on stocks from the Nasdaq 100 Index.
JEPQ holds ELN’s (Equity Linked Notes) with an underlying covered call strategy that effectively writes call options on stocks from the Nasdaq 100 Index to generate income and subsequently pay a high monthly distribution yield.
Are JEPQ dividends qualified?
No, dividends from JEPQ are not qualified.
Can JEPQ sustain dividends?
Unfortunately the future is unpredictable. We’ve already seen the distribution yield of JEPQ can fluctuate in its short lifespan thus far.
JEPQ can go down with the underlying Nasdaq 100 Index. Writing covered call options does not make JEPQ immune from market downturns.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a research report. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
