The Chase For Yield Is On: JEPY And QQQY

A sideways market or a market that is slowly falling benefits the likes of income producing investors that utilize selling options.

The key option strategy that can work during market conditions like this is the covered call strategy.

When you sell a covered call, you leverage positions within your portfolio by writing a call, which means you earn a premium.

If the underlying share price rises above the strike price, you sell your positions at that cost.

However, if the underlying price moves sideways or falls lower, the premium collected is your income.

Selling options is a key strategy of mine and options in general have gained in popularity over the past few years.

You can see in the chart below how the number of options and futures traded have exploded higher the past few years, and 2023 is expected to be yet another record year.

The idea of options is intriguing, but some investors either do not have the time or they do not have the knowledge, or a mix of both. Investment firms have helped with all of that by creating income producing ETFs.

The most popular ETF that utilizes an options strategy to generate higher income in order to pay a high distribution yield. The most popular, high distribution yield, option strategy ETF at the moment is JPMorgan Equity Premium Income ETF (JEPI).

JEPI is not that old, as it was formed in May of 2020, but it has grown in popularity quite quickly. Today, JEPI has a total of $29 billion in assets under management or AUM.

The ETF pays out a monthly distribution, which changes every month based on how successful the option selling was for that time period. Currently, JEPI has a trailing twelve-month distribution yield of 9.7%.

JEPI owns stocks, but it also sells option contracts to generate a higher amount of income, which is why the distribution yield is so high.

With the popularity of income related ETFs hitting the market, I am going to discuss two brand new ETFs that recently hit the market and are focused strictly on income.

2 New Income Related ETFs

ETF #1 - Defiance S&P 500 Enhanced Options Income ETF (JEPY)

JEPY was just launched in September and is solely based on income. The strategy of this new ETF is pretty simple.

Every day, the Fund will sell put options that are priced either at-the-money or up to five percent in-the-money (i.e., higher than the current market price).

If the Fund sells an option that’s priced above the current market price, the Fund may profit if the Index increases in value above its current price. This opportunity exists until the option’s expiration date, which is typically the next day.

By selling an in-the-money put, this generates a higher premium. If the underlying index increases in price, JEPY earns 100% of the premium, but if the index price falls further, the option would expire at a loss by paying the option buyer the difference between the index price and

the strike price of the option. This is a high-risk trade as the option sold is a 0 DTE option, meaning it has less than one day until expiration. The higher the risk the higher the ROI potential as well.

Unlike JEPI, which owns underlying positions in stocks, JEPY does not have any underlying positions. The only trades are the daily 0 DTE options being sold.

JEPY, as you can imagine, is an actively managed fund, as the fund managers are selling new option contracts every month, the ETF is priced with an initial expense ratio of 0.99%, which the idea is that investors will earn that back and more through high monthly distributions.

At the end of September, JEPY declared their first monthly distribution which was $0.90 per share and was paid out the following week. Annualizing this equates to an annual distribution rate of 56.8%, but as you know, the monthly distributions will change every month.

ETF #2 - Defiance Nasdaq 100 Enhanced Options Income ETF

Now we are moving onto yet another new ETF, which was formed in the past month, and that is the Defiance Nasdaq 100 Options Income ETF (QQQY).

QQQY was formed by the same group that created JEPY, so as you can imagine, the strategy is similar in many ways. To begin, the ETF focuses on selling QQQ index options with 0 days until expiration.

The Nasdaq 100 Enhanced Option Income ETF is the first put-write ETF using daily options, with expirations less than a day later, or “0DTE”. The goal behind 0 DTE options is to seek enhanced income for investors, which is then, like JEPI and JEPY, distributed on a monthly basis.

Again, like JEPY, QQQY has no underlying positions, and only utilizes the options strategy.

QQQY declared their first monthly distribution of $1.10 per share at the end of September.

If you annualize this first distribution, this equates to QQQY having a high distribution yield of 69.6%. This is the primary goal of this ETF, to pay an extremely high distribution out.

Like JEPY, these distribution amounts are going to fluctuate from month to month.

Like JEPY, QQQY is an actively managed fund with new option contracts being put together each day, which means the expense fee is likely to be on the higher end. The expense fee is the same as JEPY at 0.99%, but the high ROI potential is expected to far surpass this expense fee.

In Closing

To recap, JEPY and QQQY are new income ETFs hitting the market that focus on generating an "enhanced yield" for investors by using their three-tiered building blocks:

1. Less than 1 day DTE: Short term option expirations can generate higher yields and it also allows the fund managers to do this on a regular basis.
2. Put Write - The ETF managers will be selling slightly in-the-money put options to generate more yield.
3. Actively-Managed - Although actively-managed ETFs come with a much higher expense ratio, the JEPY team believe the enhanced yield will more than pay for the higher expense ratio.

These ETFs take pure-play income to another level...

Who's buying?

Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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