How are 0DTE ETFs like QQQY and JEPY fairing in 2024?

Zero-day-to-expiry (0DTE) options have become highly popular in the US and India, where they account for most of the options market. A recent report found that these options account for over 40% of the daily volume of the S&P 500 index. 

The rise of 0DTE options led to the launch of ETFs in 2023. The Defiance S&P 500 Enhanced Options Income ETF (JEPY) and Defiance Nasdaq 100 Enhanced Options Income ETF (QQQY) have accumulated over $116 million and $254 million, respectively.

How these ETFs work

Demand for active funds has jumped sharply in the past few years. As I have written before, funds like JPMorgan Equity Premium ETF (JEPI) and the JPMorgan Nasdaq Equity Premium ETF (JEPQ) have accumulated over $33 billion and $15 billion in assets, respectively.

JEPI and JEPQ work in a fairly simple way where they invest in companies in the S&P 500 and Nasdaq 100 indices. They then sell the index call options, which give a holder the right buy but not the obligation to buy an asset.

These funds benefit when their respective indices are rising. In this case, they benefit from both the indices rise and the premiums generated from call options. They also make the premium when the indices are either flat or are rising. 

0DTE ETFs like QQQY and JEPY work in the same way, with the only difference being that their options contracts have a maturity of 24 hours or less. QQQY aims to generate monthly yield distributions coupled with an exposure to the Nasdaq 100. 

Similarly, the JEPY ETF was the first put-write ETF focused on the S&P 500 index using daily options. Its name is a play on JEPI, which has became the biggest active fund in the industry. 

A major difference between these funds and JEPI and JEPQ is that they don’t hold companies in the S&P 500 and Nasdaq 100 indices. Instead, they own a portfolio of Treasury bonds that are used against the options they write.

QQQY and JEPY performance

Most investors love the QQQY and JEPY because of their substantial distributions. At the time of writing, JEPY has a distribution rate of 33.76% and the 30-day SEC yield of 4.13%. QQQY, on the other hand, has a distribution rate of 52.55% and a 30-day SEC yield of 4.11%.

These distributions seem too good to be true. However, a closer look shows that the payouts have been falling since inception. QQQY started by distributing $1.10 in September last year,a  figure that has dropped to $0.6573. 

Similarly, the JEPY ETF’s distributions started at $0.90 in the same month and has dropped to $0.46. 

While their yields have been strong, data shows that their total return has underperformed generic ETFs like Invesco QQQ (QQQ) and the SPDR S&P 500 ETF (SPY). This performance is in line with what I wrote about JEPI and JEPQ. 

JEPY vs QQQY vs QQQ vs SPY

As shown above, the JEPY ETF has had a total return of 9.5% this year while the SPDR S&P 500 (SPY) has risen by over 16.7%. Similarly, the QQQY ETF has risen by 10% while the QQQ has risen by more than 20%.

This performance explains why investors should always consider an asset’s total return instead of the yield. The total return is different from the price return since it includes dividends. 

Data also show that JEPI and JEPQ are outperforming JEPY and QQQY. The JEPI ETF has had a total return of 5.72% while the JEPQ has jumped by almost 17%.