JEPI vs JEPQ

Who wins the battle for the best income ETF, JEPQ or JEPI?

As a baseline, let’s briefly start with how they’re similar.

Both of these are covered call ETFs. What’s a covered call ETF? In a nutshell, it buys stocks, then writes, or sells, call options on them.

A call option gives the buyer the right to buy a stock at a set price. Of course, they’d only want to do that if the stock goes HIGHER than that price. So, if you’re SELLING those options, like these ETFs are, that means SOMEONE ELSE gets to benefit from the upside in the stocks if they go up a lot.

So to recap, they buy stocks, then sell call options on them. That means you get A LITTLE of the upside potential, but then anything beyond that set price, which is called the strike price, you give up. And what do you get for giving up your upside potential? A big fat income check, and THAT is why people buy ETFs like JEPQ and JEPI. Right now JEPI is yielding 8.5% and JEPQ is yielding 10.78%.

So does that mean JEPQ is better? No. It WILL almost always have a higher yield, but that higher yield comes with higher risk.

You get SOME dividends from holding the stocks, but most of the income comes from selling the options.

The more volatile the stocks are, and the more potential upside you’re giving up, the more income you’ll get from the options. That’s why JEPQ will normally have a higher yield, because it’s riskier.

JEPQ’s stocks loosely track the NASDAQ 100. It’s not an exact replica, but pretty close. That means it’s over 40% in tech stocks right now, and has A LOT of exposure to just a few companies.

JEPI is actively managed and starts with the stocks in the S&P 500, but rather than try to mimic the index, they basically try to create a lower-risk version of it.

That’s important, because if you’re going to give up the upside potential, you want to also be protected on the downside.

For example, they have limits on how much can be in any one sector or company. That helps lower the risk because the more exposed you are to one thing, the more at-risk you are if something goes wrong. If, say, interest rates went up, or there’s a new wave of tech regulations, or a trade war impacts the supply of key materials for tech companies, that would likely have a more negative impact on JEPQ than JEPI.

That brings us to another key point… while more risk gets you higher income, it also gets you.. well.. more risk.

When you sell a call option, you give up your upside potential, but you KEEP all the downside potential. The ETFs own the stocks, so if the stocks go down, the ETFs go down just as much, with the only difference being whatever they collect from the option income.

Here’s where JEPI and JEPQ are really set apart.

NEITHER has that much upside potential because they’re both selling call options that give away most of it. JEPQ has A LITTLE more upside potential when tech stocks are doing well, but long-term growth isn’t the main reason to own either of these.

On the other hand, JEPQ has MUCH more downside potential, because it’s so much more exposed to one sector and a small handful of companies, and it’s NOT managed to limit downside risk the same way JEPI is.

This illustrates that risk/reward trade-off perfectly.

You can see from the red line that in the first few months since JEPQ was launched, it fell almost 15%. JEPI only fell about 7 and a half percent, and by late December JEPQ was down more than 12% while JEPI was up more than 1%. In a down market, ESPECIALLY one where tech does poorly, JEPI should be expected to hold up better than JEPQ.

However, you can also see that JEPQ recovered more strongly in 2023 as tech stock rallied on AI optimism and the expectation of falling interest rates.

If we replace them with the regular index funds WITHOUT covered calls, qqq for the NASDAQ 100 in red, which is what JEPQ is most similar to, and SPY for the S&P 500 in blue, which is what JEPI is most similar to, we can get an even better sense for how these ETFs behave in different market environments.

Starting with the red line, QQQ fell a little over 15% by its low point in October. JEPQ only fell a little UNDER 15%... so it really didn’t offer that much downside protection.

By contrast, SPY fell about 13%, and JEPI only fell about 7.5%.

The downside protection was better with JEPI, which is what I would expect most of the time since it’s managed more for that purpose, and it’s not so concentrated in tech stocks.

This next part is important. See how QQQ has pulled ahead of SPY?

A lot of people see that JEPQ has beaten JEPI and say things like “JEPI’s growth can’t compete with JEPQ’s.” That’s true if tech is beading every other sector, like it has been lately. But if it’s not, JEPI could definitely beat JEPQ.

In the end, BOTH ETFs have trailed their non-covered call cousins by about 10% since JEPQ’s inception. That is a total coincidence.

JEPI offered more downside protection than JEPQ, which is likely to happen most of the time. JEPQ offered more upside than JEPI, which will probably happen more often than not, but if tech stocks fall out of favor, JEPI could do better, even in an up market.

Both of them are managed using equity-linked notes, or ELNs, which make the stocks more tax efficient but the option income less tax efficient.

Personally, I am not a fan of covered call ETFs, in general. I think giving up most of your upside potential and keeping most of your downside potential is not a good deal for investors in the long run.

However, JEPI’s lower volatility approach makes it a little bit more attractive as a piece of a portfolio for investors who want a higher income, lower risk version of the U.S. stock market.

From the beginning of 2022 to its lowest point, JEPI only fell about half as much as the S&P 500. JEPQ hasn’t been around for any downturns as big as this one, but in the few times we can look at, it has not shown the ability to protect on the downside nearly as well. That makes perfect sense, because JEPI is managed more specifically to limit the downside, while JEPQ is not.

Everyone’s situation is different, so I can’t give anyone advice on here, but since there’s almost NO scenario in which I’d buy JEPQ and I COULD make the case for JEPI, in my opinion, JEPI is the winner.

However, for younger investors who want more long-term growth potential, I think ANYTHING that sells covered calls is likely to underperform its counterpart WITHOUT the covered calls in the long run.

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