The JPMorgan NASDAQ Equity Premium Income ETF (JEPQ) is firing on all cylinders as investors boost their allocations. It has jumped to a record high, while its inflows have jumped by over $8 billion this year. It has had net outflows in just two weeks this year.

JEPQ now holds over $29 billion, making it one of the biggest funds in the covered call industry. Still, despite this growth, and its 11% dividend yield, there are reasons to avoid it this year.

JEPQ ETF is expensive 

The JPMorgan NASDAQ Equity Premium Income ETF is an active managed fund that mostly tracks companies in the Nasdaq 100 Index and then generates income from selling call options.

The fund generates its dividend from the portfolio dividends and also from the call option premium. While the premium is good, it also caps the long-term gains, especially when the Nasdaq 100 Index is in a strong rally.

As such, being an actively managed fund, is more expensive than other passive funds like the Invesco QQQ ETF (QQQ) and the Vanguard S&P 500 (VOO). In this case, it charges an expense ratio of 0.35%, meaning that $100,000 costs about $350 annually.

In contrast, Invesco NASDAQ 100 ETF  (QQQM) charges 0.15%, which costs about $150 a year. The $200 difference is a big one, especially when you are holding it for many years.

JEPQ does not generate excessive returns

A high expense ratio is always understandable when one is investing in an asset that has demonstrated its outperformance. 

In JEPQ’s case, the main benefit is that it has a high dividend yield than most ETFs. Its 11% yield is much more than the 1% that the Nasdaq 100 Index offers. This means that one always receives a higher dividend check than those who invest in QQQM.

The challenge, however, is that dividend returns don’t necessarily lead to higher total returns, which include the stock performance and the dividend.

By leveraging the covered call strategy, the fund’s gains are always capped, especially when the Nasdaq 100 Index is in a strong rally.

As such, when considering the total return, the QQQM ETF consistently outperforms JEPQ. QQQM’s total return in the last 3 years was 100%, while JEPQ gained by 73%. A 27% difference is substantial and not worth giving up.

JEPQ v QQQM vs QQQ vs JEPI

JEPQ has tax limitations 

The other important reason to avoid the JEPQ ETF is that it has tax limitations that are not worth it. For one, unlike other popular covered call ETFs, JEPQ uses equity-linked notes (ELN), which don’t qualify for preferential tax treatment. Instead, the options premium are taxed at a less favorable ordinary income tax rate.

All this means that the JEPQ ETF is both an expensive fund offering a lower return and one that is taxed at a higher rate than ordinary dividends. 

To sum it all up, most investors with a long-term horizon will always do well by investing in simple passive ETFs than the fancy active funds.

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