- JEPI and JEPQ ETFs are popular among income-hungry investors.
- The two funds have a dividend yield of over 8% and 11%, respectively.
- IBIT and other Bitcoin ETFs are good ones to diversify with.
The JPMorgan Premium Equity (JEPI) and the JPMorgan Nasdaq Equity Premium ETF (JEPQ) are two of the most popular covered call ETFs in the market with over $31 billion and $9 billion in assets, respectively.
These funds have seen strong inflows from income-focused investors in the past few years. This article will explain why these investors should consider investing in the iShares Bitcoin ETF (IBIT) or other Bitcoin-focused ETFs.
What are JEPI and JEPQ?
Broadly, there are two main types of ETFs in the market: active and passive. Passive ETFs are those that track an already-defined index. For example, the SPDR S&P 500 ETF tracks the S&P 500 index while Invesco QQQ tracks the Nasdaq 100 index.
Active ETFs, on the other hand, rely on the portfolio manager, who buys and sells assets after doing an in-depth analysis. JEPI and JEPQ are classified in this category. Their concept is fairly simple. JEPI invests in companies in the S&P 500 index while JEPQ invests in those in the Nasdaq 100 index. As such, they benefit when these indices are going upwards.
In addition to this, these funds aim to hedge against risk by using covered calls. In this case, after buying these companies, the ETF sells call options for the main indices. A call option gives a person a right but not the obligation to buy an asset.
The idea behind this is simple. If the index declines below the call price, the options trade becomes invalid and the ETF keeps the premium. This happens because one would be able to buy the index at a cheaper price directly in the market If the index rises, the ETF benefits from both the price move and the premium it generates.
JEPI and JEPQ also benefits when the index remains unchanged because they will retain the premium. The funds then distribute this call option premium to investors, which explains why they are able to pay monthly dividends. JEPI has a dividend yield of 8.2% while JEPQ has 11%.
The case for IBIT and other Bitcoin ETFs
JEPI and JEPQ investors tend to focus mostly on the monthly income. As such, to them, it is a bit odd to recommend investing in ETFs that track Bitcoin, one of the riskiest assets in the world. The same is true with SCHD investors, whom I wrote about here.
Yet, a case can be made for investing in Bitcoin. First, historically, Bitcoin has done better than the S&P 500 and Nasdaq 100 indices since it has moved from less than $1 in 2009 to over $42,000 today. Investors who bought and held Bitcoin back then are quite rich today.
Second, Bitcoin has proven itself over a long period of over 15 years. In this period, it has had to deal with several black swan events like the collapse of MT. Gox, FTX, Terra, Celsius, and Voyager Digital. All these were serious events that could have led to its death. It has also survived the high interest rate environment.
Third, Bitcoin has started to gain institutional acceptance, as evidenced by the success of the recent ETFs. They were all launched by popular traditional companies like Fidelity, Invesco, Blackrock, and Franklin Templeton.
Further, Bitcoin is a rare asset that has room to run. It has a supply limit of 21 million coins, which is quite small in a world of over 7 billion people. Over 6 million of these coins have been lost forever while almost 17 million have been mined. Therefore, the value of each coin will continue growing, especially after the halving event.
Therefore, for JEPI and JEPQ investors, adding IBIT is a good way to diversify your returns over time.
