As JEPI and JEPQ ETFs gain traction, are they good income investments?

Covered call ETFs are becoming extremely popular among investors. Data shows that investors have poured over $10 billion in JPMorgan Equity Premium Equity Income ETF (JEPI), bringing its total assets to more than $28 billion. Similarly, JP Morgan Nasdaq Equity Fund has grown to have over $3.4 billion in assets. So, which is better between JEPI and JEPQ?

Are covered call ETFs worth it?

Long-term investors seeking to benefit from the ongoing bull market have many options in their disposal. If you want to sleep well at night, I recommend that you invest in old-school ETFs like the SPDR S&P 500 ETF (SPY) and Invesco QQQ. Historically, these funds have always risen. 

Another option that many investors are choosing is known as covered calls. A covered call ETF is a fund that involves selling slightly out-of-the money S&P 500 or the Nasdaq 100 call options. As a result, it allows the purchasers to buy the index at a set price and a fixed expiry date. Therefore, these funds tend to underperform the market when stocks are rising and the option is triggered.

Covered call ETFs then pockets the premium for writing the options regardless of what happens, This happens since the funds cushion investors when the options are triggered. They then underperform the market when the options are not triggered.

The S&P 500 and Nasdaq 100 indices have done well this year, which explains why these ETFs have underperformed. For example, the JEPQ ETF has risen by over 24% this year while Invesco QQQ has jumped by almost 40%. Similarly, JEPI ETF has jumped by just 4% why the SPY fund has risen by over 16%.

There is a likelihood that the two funds will continue underperforming if American stocks continue rising. And macro conditions are favoring these stocks. For one, the Federal Reserve has paused its interest rates hikes. Investors are also getting extremely greedy as evidenced by the soaring fear and greed index?

JEPI vs JEPQ vs QQQ vs SPY

JEPI vs JEPQ: better investment?

As mentioned, I believe that investors should allocate their funds in popular ETFs like SPY, SCHD, and QQQ. These funds have a long track record of success in the market since American stocks always go up despite the drawdowns in 2008, 2020, and 2022. 

Further, these funds are significantly cheaper than covered call funds. QQQ and SPY have an expense ratio of less than 0.25% while JEPI and JEPQ have an expense ratio of 0.35%. In a note, an analyst at MorningStar said:

Investors can also allocate some of their funds to JEPI and JEPQ to hedge against risks and to generate some income. Both JEPI and JEPQ have a dividend yield of 11.35% while QQQ and SPY have a yield of less than 1%.