JEPQ Vs. GPIQ: A Fight Of NASDAQ 100 Income ETFs

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Introduction

Despite CDs and other fixed income investments, after a decade of low rates, finally providing investors with decent income streams, higher consumer prices and interest rates on consumer debt or new home mortgages has some investors hoping their equity exposure can come to the rescue and provide some cash flow. When the FOMC starts cutting interest rates, investor income will drop faster than what their credit card and other consumer debt costs will.

With the desire to still participate in the stock market, one popular choice is option-writing ETFs like the JPMorgan Equity Premium Income ETF (JEPI), with its S&P 500 Index focus. I recently reviewed and compared that ETF against a new challenger, the ProShares S&P 500 High Income ETF (ISPY), which earned a Buy rating (article link).

Here, I compare another set whose strategy is based on the NASDAQ 100 Index, the first being more well-known:

• JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
• Goldman Sachs Nasdaq-100 Core Premium Income ETF (NASDAQ:GPIQ)

While this might change as GPIQ provides more history, I am declaring the winner of this fight goes to GPIQ but not by a knockout. The fight was awarded based on GPI’s higher yield and use of the more understood options-writing strategy versus using ELNs. My concern about over-valued Tech stocks results in a Hold rating for both ETFs though.

JPMorgan Nasdaq Equity Premium Income ETF review

Seeking Alpha describes this ETF as:

The JPMorgan Nasdaq Equity Premium Income ETF invests directly and through derivatives in stocks of companies operating across diversified sectors. The fund uses derivatives such as options to create its portfolio. It invests in growth and value stocks of companies across diversified market capitalization. It invests in stocks of companies that are deemed socially conscious in their business dealings and directly promote environmental responsibility. It employs fundamental analysis to create its portfolio. It seeks to benchmark the performance of its portfolio against the Nasdaq-100 Index. The fund employs proprietary research to create its portfolio. The ETF started in May of 2022.

Source: seekingalpha.com JEPQ

JEPQ has over $15b in AUM and charges investors 35bps in fees. The TTM Yield is just under 9%.

JPMorgan explains their approach in three points:

• Generates income through a combination of selling options and investing in U.S. large cap growth stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends.

• Seeks to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility.

• Constructs a long equity portfolio through a proprietary data science driven investment approach designed to drive portfolio allocations while maximizing risk-adjusted expected returns.

JEPQ holdings review

Like its sister ETFs, JEPQ uses equity-linked notes, or ELNs. For those new to ELNs, here is a brief overview of the product.

What is an Equity-Linked Note (ELN)?

An equity-linked note (ELN) is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity.

Understanding Equity-Linked Notes

Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped. Even in the worst-case scenario, most equity-linked notes offer full principal protection.

Source: investopedia.com ELNs

The sector allocations weights when ignoring the ELNs match closely to the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 Index JEPQ benchmarks against.

The top 20 holdings not counting the ELNS are as follows, which again aligns with the QQQ ETF holdings as expected.

While investors own JEPQ for the income, they better like the underlying equities too as their performance drives the CAGR this ETF provides. Not counting the ELN holdings, the Top 20 equate to about 65% of the total portfolio. JEPQ currently holds 11 ELNs for 15.36% of the total portfolio weight.

One added risk with using ELNs is counterparty risk. Payment and ELN settlement requires the underwriting firm to honor their agreements. To minimize that risk, JPMorgan spreads the ELNs across several firms. The following shows the ELNs from the end of March, the most recent detailed list I found.

JEPQ distributions review

JEPQ has an extremely high turnover rate (162% last year), thus distributions that would otherwise qualify for the favorable tax treatment will most likely be considered ordinary income.

Goldman Sachs Nasdaq-100 Core Premium Income ETF review

Seeking Alpha describes this new competitor as:

The Goldman Sachs Nasdaq-100 Core Premium Income ETF invests in public equity markets. It invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to creates its portfolio. The fund invests in value and growth stocks of companies across diversified market capitalization. The fund seeks to benchmark the performance of its portfolio against the Nasdaq-100 Index. Goldman Sachs ETF Trust – Goldman Sachs Nasdaq-100 Core Premium Income ETF was formed on October 24, 2023.

Source: seekingalpha.com GPIQ

GPIQ has just under $104m in AUM and comes with a slightly lower cost of 29bps until the 6bps waiver ends later this year. Annualizing the 2024 monthly payments indicates a yield just under 10%.

Goldman Sachs lists three benefits of their ETF:

Seeks Consistent Monthly Income: Aims to generate a consistent monthly distribution rate generally from options premium and equity dividends.

Core Equity Exposure with Lower Volatility Potential: Provides core equity exposure to the Nasdaq-100 Index and dynamically sells call options, allowing for participation with rising markets and potential outperformance in negative to flat markets.

Diversifying Source of Yield: Seeks to deliver attractive yield with a lower correlation to traditional income sources and their risks.

Source: Goldman Sachs GPIQ

Unlike JEPQ use of ELNs to generate additional income, GPIQ sells (writes) call options on a varying percentage of the market value of the portfolio, targeting between 25% and 75%, rebalanced monthly based on the value of the equity investments held by GPIQ. The Fund may invest in FLexible EXchange® Options (“FLEX Options”), other types of listed options and over-the-counter (“OTC”) options.

GPIQ holdings review

Sector match up well with both the JEPQ and QQQ ETFs, as I would have expected.

I did not feel these weights needed adjusting as the non-equity weight of the portfolio was typical for many ETFs.

Like JEPQ, the Top 20 comes to 65% of the portfolio, with the largest ten positions representing most of that. As before, better love these stocks as the income strategy is minor in the total return calculation.

GPIQ distributions review

While history is short, the income provided to investors has varied little from month-to-month. Goldman Sachs lists dividend as all from income, though I suspect little might be qualified as distributed option income is not so classified.

Comparing ETFs

Since most of both ETFs are the same 100 stocks that comprise the NASDAQ 100 Index, when the weights are adjusted in JEPQ to eliminate the ELN allocation, the two ETFs could be twins. Where they differ is the income generation strategy employed, with JEPQ using those ELNs and GPIQ using the more common strategy of writing Call options. With GPIQ still short of its first birthday, my calculated annualized yield of 10% is above JEPQ’s current TTM yield of only 8.9%. Performance wise, the chart looks like this. I included the QQQ ETF.

Since Both ETFs restrict their upside via ELNs or Call options, both have lagged behind the benchmark ETF, QQQ. Between JEPQ and GPIQ, there is no winner when looking at CAGR, though as mentioned, GPIQ is providing more income. The winner gets murkier when comparing other data points that measure risk.

Due to a lower StdDev, JEPQ has better Sharpe and Sortino ratios, though the differences are small and the history is very limited.

Conclusion

While this might change as GPIQ provides more history, I am declaring the winner of this fight goes to GPIQ but not by a knockout. The fight was awarded based on GPI’s higher yield and use of the more understood options-writing strategy versus using ELNs. That said, a final reminder that neither will perform well if the large US Technology stocks hit a slump.

Portfolio strategy

Whether using equity exposure is a good approach to generated needed income over using dull fixed income assets like CDs or more risky ones like mREITs or Business Development Corporations is worth considering. With each asset class coming with its own set of benefits and risks, which will vary over time, some allocation to each makes sense for almost all investors. My 93-year-old dad only used non-tech large-cap stocks to produce all the income he thought was needed to support him and my mom. With his passing, I rearrange the portfolio to a much lower equity weight figuring growth isn’t needed now. The result of adding CDs, HY bond ETFs and a small allocation to REIT preferred stocks has double the income and changed where the risk is coming from, with an overall lower StdDev than before. Yes, this means I am following a portfolio strategy that does not rely on equities to provide most of the income.