Covered call ETFs such as JEPI (JPMorgan Equity Premium Income ETF) and JEPQ (JPMorgan Nasdaq Equity Premium Income ETF) have gained massive popularity in recent years. Their promise of high monthly income makes them especially attractive to investors seeking stable cash flow. However, when considering these ETFs for the long term, investors must carefully weigh both their advantages and potential risks.
1. How Covered Call ETFs Work
A covered call strategy involves owning a portfolio of stocks and selling call options on those holdings. This allows the fund to collect option premiums as income, which are then distributed to investors as monthly dividends.
For example, JEPI holds large-cap U.S. stocks like Microsoft, Johnson & Johnson, and Visa. By selling call options on these holdings, it generates consistent cash flow — resulting in yields of around 7–10% annually, depending on market conditions.
JEPQ operates similarly but focuses on Nasdaq 100 tech stocks, which tend to have higher volatility and therefore offer higher option premiums.
2. The Benefits: Steady Income and Lower Volatility
The main attraction of covered call ETFs is their high income potential. Investors receive regular monthly distributions that can easily surpass those of traditional dividend ETFs like SCHD or VIG.
Additionally, because selling call options generates immediate income, it can reduce portfolio volatility during market downturns. In other words, JEPI and JEPQ tend to fall less sharply when markets decline, providing a measure of downside protection.
3. The Trade-Off: Limited Growth Potential
The biggest drawback of covered call ETFs is that they cap upside potential. When the fund sells call options, it gives up the right to participate in full stock price gains beyond a certain point.
Over time, this means that while you receive high income, you sacrifice long-term capital growth. For instance, during strong bull markets (like 2020–2021), JEPI and JEPQ underperformed compared to growth ETFs such as QQQ or SPY because their upside was limited by their options strategy.
For young investors or those with a long investment horizon, this trade-off between income and growth can significantly impact wealth accumulation over decades.
4. Dividend Stability and Tax Considerations
Although JEPI and JEPQ provide high monthly payouts, their dividends are not guaranteed or fixed. The income depends on the volatility of the market and the performance of the options sold. When volatility decreases, so do the premiums — leading to lower dividend payouts.
Additionally, much of the income from covered calls is taxed as ordinary income, not as qualified dividends. This can reduce after-tax returns, particularly for investors in high tax brackets.
5. Are JEPI and JEPQ Suitable for Long-Term Investors?
Covered call ETFs like JEPI and JEPQ are ideal for income-focused investors, such as retirees or those seeking to supplement monthly cash flow. Their stability and consistent payouts are valuable in uncertain markets.
However, for younger investors with decades ahead, relying heavily on covered call ETFs may not be optimal. The limited growth and tax inefficiency can hinder the long-term compounding effect that drives wealth creation.
A balanced strategy could involve combining covered call ETFs for income with growth-oriented ETFs (like SCHD, VOO, or QQQ) for capital appreciation. This approach allows investors to benefit from both regular cash flow and long-term growth potential.
Conclusion
While covered call ETFs like JEPI and JEPQ are not inherently risky, they are not designed for maximum long-term growth. Their primary purpose is to generate steady income with reduced volatility, not to outperform the broader market over time.
If your goal is retirement income or portfolio stability, these ETFs can play an important role. But if you’re in your 20s or 30s and focused on building wealth, prioritizing growth-focused investments may yield better long-term results.