Passive income is a key component of any retirement strategy. Fortunately, the stock market is brimming with passive-income vehicles. Several exchange-traded funds (ETFs), in fact, offer monthly dividend checks. Two of the better-performing monthly dividend check payers in recent history are the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 1.39%) and the JPMorgan Equity Premium Income ETF (JEPI 0.30%).
Both of these funds use a strategy called covered call writing, which involves selling call options on the underlying stocks in exchange for a premium. This premium is then distributed to the shareholders as dividends. The advantage of this strategy is that it can generate income regardless of the market's direction, as long as the underlying stocks don't rise above the strike price of the options.
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Here's an in-depth look at these top passive-income plays.
A top derivative-income vehicle
The JPMorgan Nasdaq Equity Premium Income ETF uses the Nasdaq 100 index as its prospectus benchmark. The Nasdaq 100 consists of 100 of the largest and most innovative companies in the United States. The fund generates monthly income through a combination of selling covered calls and receiving dividends from its stock holdings.
The fund sports a scorching annualized yield of 9.73% at current levels. However, its payout can vary dramatically from month to month, due to its particular strategy.
Another important issue to understand is that the JEPQ is an actively managed fund, so it can have a high turnover rate and its holdings can stray significantly from its prospectus benchmark. That said, its expense ratio of 0.35% isn't unreasonable for an actively managed fund paying a top-shelf yield.
Over the past 12 months, the JEPQ has markedly outperformed the S&P 500, thanks to the strong performance of its top holdings like Microsoft and Nvidia. The one drawback is that most of the fund's holdings now sport premium valuations due to the market's recent bull run.
JEPQ Total Return Level data by YCharts.
If tech earnings slow down in response to a weakening economy later this year, the JEPQ may fall in value, as well. As such, this ultra-high-yield vehicle comes with some unique risks, due to its premium-laden tech holdings and covered-call strategy.
A U.S. large-cap derivative-income play
The JPMorgan Nasdaq Equity Premium Income ETF uses the S&P 500 as its prospectus benchmark index. Like the JEPQ, it generates monthly income through a combination of selling covered calls on its stock holdings and collecting dividends from those stocks.
Given its ties to the S&P 500, the JEPI invests mainly in large-cap U.S. stocks. Its top five holdings at the time of this writing are Progressive, Meta Platforms, Trane Technologies, Amazon, and Microsoft. It's also an actively managed fund with a reasonable expense ratio of 0.35%. On the dividend side, the JEPI presently offers a healthy 8.26% annualized distribution.
The JEPI has delivered strong returns for shareholders over the past year but has lagged behind the red-hot S&P 500 over this period.
That's not the end of the world, especially for a passive-income play. Income vehicles, after all, are generally prized for their ability to generate steady income without constantly losing value. Since its inception, the JEPI has checked both of those boxes, making it an excellent addition to an income-oriented portfolio.
