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.
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:
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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.
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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.
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The top 10 holdings include the entire list of “Magnificent 7” stocks — proven winners with very large market caps.
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Some of those tech giants don’t pay dividends, but the fund managers generate monthly income from them in other ways.
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Annual dividend yields currently stand at 9.3% after rising above 12% over the summer.
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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:
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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.
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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.
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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.
