If you were to invest in an S&P 500 exchange-traded fund (ETF) today, you'd capture a yield of just 1%. Not too impressive. Move up to a dividend ETF, however, and you could find a yield in the 3% to 4% range. That's better, but it still might not deliver the income you're hoping for.
Covered call ETFs are where you can start earning yields of 10% or higher. To be clear, there are trade-offs to owning a covered call ETF versus a straight equity fund. But pure income seekers like these because they can deliver high, steady yields and have a predictable payoff structure. If you know what you're buying, these can be great options.
One of the most popular options in this space is the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ +0.22%). As the name suggests, it begins with exposure to the Nasdaq-100 index and writes call options against the securities to generate a high yield. As of Nov. 30, it offers a yield of 11.5%.
Before you go scrambling to your brokerage account to load up on shares, it's important to know how the fund works and what you're buying. Once you do, you can understand how even a modest starting investment of $10,000 can generate hundreds of dollars of income over the course of a year.
Image source: Getty Images.
Earning high yields on a tech-heavy portfolio
JEPQ is a little unusual in that it doesn't follow the traditional path of buying stocks and then writing call options on those stocks. It invests in equity-linked notes (ELNs), which are a combination of the long stock and short call in a single security.
The use of ELNs introduces some unique risks for JEPQ, namely counterparty risk. In layman's terms, it means the bank issuing the note could go under, taking the value of the note down with it. For the most part, investors won't notice any difference in performance or behavior when using ELNs, but there are some structural issues to consider.
These products, despite their complexity, draw interest due for their potential for double-digit yields. The option income generated by these strategies is highly correlated with the level of volatility in the underlying security or index. Because the Nasdaq-100 tends to be more volatile, income and yields tend to be higher. The ability to pay out this income on a monthly basis has been another selling point.
NASDAQ: JEPQ
Key Data Points
How $10,000 could produce over $1,000 in annual passive income
As mentioned earlier, JEPQ offers a current yield in the 11% to 12% range. That number fluctuates over time, but it's a reasonable number to expect going forward given its history.
But let's look instead at the actual monthly distributions to see how we get to the $1,000 annual income number.
| Ex-Date | Record Date | Pay Date | Dividend Paid |
|---|---|---|---|
| 12/31/2024 | 12/31/2024 | 01/03/2025 | $0.45584 |
| 02/03/2025 | 02/03/2025 | 02/05/2025 | $0.45019 |
| 03/03/2025 | 03/03/2025 | 03/05/2025 | $0.48238 |
| 04/01/2025 | 04/01/2025 | 04/03/2025 | $0.54069 |
| 05/01/2025 | 05/01/2025 | 05/05/2025 | $0.59786 |
| 06/02/2025 | 06/02/2025 | 06/04/2025 | $0.62074 |
| 07/01/2025 | 07/01/2025 | 07/03/2025 | $0.49416 |
| 08/01/2025 | 08/01/2025 | 08/05/2025 | $0.44377 |
| 09/02/2025 | 09/02/2025 | 09/04/2025 | $0.44195 |
| 10/01/2025 | 10/01/2025 | 10/03/2025 | $0.44612 |
| 11/03/2025 | 11/03/2025 | 11/05/2025 | $0.47553 |
| 12/01/2025 | 12/01/2025 | 12/03/2025 | $0.55323 |
Source: JPMorgan Asset Management
Over the past 12 months, the JPMorgan Nasdaq Equity Premium Income ETF has generated a hair over $6 per share in total income (or about $0.50 per share each month).
At a share price of $59.05 (Dec. 10), a $10,000 investment would buy 169.35 shares.
Assuming that JEPQ pays $6 per share in distributions moving forward, that translates into income of $1,016.
Keep in mind that these numbers can fluctuate. The monthly distribution amount could be higher or lower depending on conditions. The larger point is that JEPQ is fully capable of delivering $1,000 a year in income based on that initial $10,000 investment.
Considerations: Capped upside and yield variability
It's important to remember that the high yields offered by covered call strategies don't come for free.
When you sell a call option, you give the buyer the right to buy the security at a predetermined price. As the price of the security increases, the odds rise that the option will be called away, and you'll need to sell at below-market prices. That's the primary downside of a covered call strategy. You give up share price appreciation potential in exchange for that high yield.
The yields can also vary over time. Generally, yields on covered call strategies tend to decrease as market volatility decreases (and vice versa). If the equity markets are exceptionally calm, there's a chance that the original $10,000 investment may yield less than $1,000 per year.
Overall, JEPQ is still a solid choice for generating a double-digit yield, just one that comes with some trade-offs. If you're looking to produce hundreds, if not thousands, of dollars of income from your portfolio, covered call strategies are a great way to do it.
