Two Monthly Income Funds Built on Different Markets

JEPI and JEPQ are sister funds from J.P. Morgan Asset Management, and both aim to pay high monthly income by owning stocks and selling call options. The key difference is what sits underneath: JEPI is built around lower-volatility S&P 500 stocks and sells options on the S&P 500, while JEPQ is built around Nasdaq-100 stocks and sells options on the Nasdaq-100.

That single difference shapes everything else. JEPQ’s technology-heavy holdings and the higher volatility of the Nasdaq-100 have generally produced a higher income yield and more growth potential, while JEPI is the more defensive of the two, designed to hold up better when markets are calm or falling.

Both funds charge 0.35% a year and pay income every month. This guide compares how each one works, where the income comes from, how they behave in different markets, how they are taxed, the risks of their equity-linked notes, and how investors use each one.

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Financial Regulation Courses (FRC) has no stake in which fund you choose. FRC sells no investments and earns no commission, so this comparison sets out how each fund is built and what that means for income and risk.

For video explainers on income ETFs, the FRC Retail Investing video series covers JEPI, JEPQ and other popular funds. FRC’s ETF Investing for Beginners course explains how ETFs work, and ETF Investing Strategies and Advanced ETF Investing cover income and options-based strategies in more depth.

FRC’s programs and memberships are open to everyone. If ETFs are new to you, start with FRC’s guide to everything you need to know about ETFs, then FRC’s guide to covered call ETFs, which explains the strategy both funds use.

JEPI vs JEPQ at a Glance

Both funds are actively managed rather than tracking an index. Their managers choose the stocks and run the options strategy within the limits set in each fund’s prospectus.

How Both Funds Generate Income

Each fund has two building blocks. The first is a portfolio of stocks that provides market exposure and some dividend income.

The second, and the larger source of income, is an options strategy. Each fund sells call options on a major index, collecting a payment called a premium from the buyers of those options.

In exchange for that premium, the fund gives up some of the index’s gains above the option’s strike price. This is the core trade-off of every covered call strategy: more income today in return for less upside when markets rally strongly.

Equity-Linked Notes Explained

Rather than selling options directly, both funds mostly use equity-linked notes, known as ELNs. These are securities issued by banks that pass the income from an options strategy through to the fund.

Using ELNs lets the managers run the options strategy efficiently at the scale these funds require. The ELNs typically make up a minority of each fund’s assets, while still producing the larger share of their income.

Because ELNs are issued by banks, their value depends partly on those banks meeting their obligations. This credit risk is described in detail in each fund’s prospectus, and the managers spread their ELNs across several issuing banks.

JEPI: The S&P 500 Income Fund

JEPI launched in May 2020 and quickly became one of the largest actively managed ETFs in the United States. Its stock portfolio is drawn from the S&P 500, with an emphasis on companies the managers judge to have lower volatility and attractive value.

Its options are linked to the S&P 500 Index. The fund is designed to deliver monthly income with less volatility than the broad US stock market, while keeping some exposure to market growth.

FRC’s guides to JEPI explained and JEPI’s dividend history cover the fund in more detail.

JEPQ: The Nasdaq-100 Income Fund

JEPQ launched in May 2022, applying the same two-part approach to the Nasdaq-100. Its stock portfolio is drawn from the 100 largest non-financial companies listed on Nasdaq, which are heavily weighted towards technology.

Its options are linked to the Nasdaq-100 Index. Because that index tends to be more volatile than the S&P 500, the options JEPQ sells generally command higher premiums, which has supported a higher income yield.

FRC’s guide to JEPQ’s dividend history shows every payout since launch. FRC’s comparison of S&P 500 vs Nasdaq explains how the two underlying indexes differ.

Why JEPQ Has Typically Paid More

Option premiums rise when the underlying index is more volatile, because the options are more likely to pay out for their buyers. The Nasdaq-100 has historically moved more sharply than the S&P 500, so call options on it usually sell for more.

That higher premium flows through to JEPQ’s monthly distributions. Since launch, JEPQ’s yield has generally been higher than JEPI’s.

The higher income comes with higher risk. The same volatility that lifts JEPQ’s premiums also means its share price can fall further and faster when technology stocks sell off.

Monthly Income That Changes

Neither fund pays a fixed amount. Because most of the income comes from selling options, the monthly payments rise when markets are volatile and option premiums are high, and fall when markets are calm.

JEPI’s monthly payments since launch have ranged from about 26 cents to 62 cents per share. JEPQ’s have ranged from about 34 cents to 70 cents per share.

Income investors should plan around a range rather than a fixed figure. A year of calm, steadily rising markets can mean noticeably lower monthly income from both funds.

Growth Potential and the Upside Cap

Selling call options caps how much each fund can gain when its index rises sharply. In a strong bull market, both funds will usually lag a plain index fund such as an S&P 500 ETF or a Nasdaq-100 ETF.

JEPQ keeps more growth exposure than JEPI, because its stocks are technology-heavy and its index has historically grown faster. Since its launch, JEPQ has also had a larger share price recovery, as technology stocks rose faster than the broader market.

JEPI keeps less upside but aims for a smoother ride. In flat or volatile markets, its income and defensive stock selection can help it hold up better than the broad market.

How They Behave in Different Markets

In a strong rising market led by technology, JEPQ usually outperforms JEPI, but both lag their plain index equivalents. The options they sell give away part of the rally.

In a flat, choppy market, both funds can shine, because they collect high option premiums while prices go nowhere. This is the environment covered call strategies are designed for.

In a falling market, both funds decline, but the option income provides some cushion. JEPI’s lower-volatility stocks have generally made it the more defensive of the two in sell-offs.

2022 showed this clearly. In a year when the S&P 500 fell about 18% including dividends, JEPI’s total return was a loss of only around 3.5%, as its defensive stocks and high option income offset much of the decline. JEPQ launched partway through that year, as technology stocks were falling sharply.

The Cost of Both Funds

Both funds charge an expense ratio of 0.35%, or $35 a year for every $10,000 invested. That is higher than a plain index ETF, which may charge 0.03%, reflecting active management and the options strategy.

It is lower than many actively managed mutual funds and options-income funds. For investors whose main goal is monthly income, the fee buys an actively run strategy that would be complex to replicate individually.

Because the fees are identical, cost does not separate JEPI from JEPQ. The choice comes down to which underlying market and risk level suits your goals.

How JEPI and JEPQ Are Taxed

This is one of the most important differences between these funds and traditional dividend ETFs. Income from the equity-linked notes is generally taxed as ordinary income, at your full income tax rate, rather than at the lower qualified dividend rates.

Only the portion of each fund’s income that comes from qualified dividends on its stocks receives the lower rate. Because the options income is the larger share, most of each fund’s distributions are usually taxed as ordinary income.

In a taxable account, the after-tax yield can therefore be well below the headline figure, especially for investors in higher tax brackets. FRC’s guide to qualified vs non-qualified dividends explains the difference in rates.

Where to Hold JEPI and JEPQ

Because their income is mostly taxed as ordinary income, many investors prefer to hold JEPI and JEPQ in tax-advantaged accounts. In a traditional IRA, the income is tax-deferred, and in a Roth IRA, qualified withdrawals are tax-free.

FRC’s guide to Roth IRA rules explains how income can build tax-free inside a Roth. Retirees taking income from an IRA can use the monthly distributions to help cover spending.

In a taxable account, the funds still work, but investors should compare the after-tax yield with alternatives. FRC’s guide to Form 1099-DIV explains how the income is reported each year.

Worked Example: The Retiree Seeking Income

A 68-year-old retiree places $200,000 in an IRA and wants steady monthly income. If an income fund’s yield averaged around 7%, it would pay roughly $14,000 a year, or about $1,170 a month, though the actual amount would rise and fall with market volatility.

For a retiree who values stability, JEPI’s more defensive portfolio may suit the goal of reliable income with a smoother share price. A retiree comfortable with more volatility might use JEPQ, or a mix of both, for higher income and more growth potential.

Holding the funds in an IRA avoids paying ordinary income tax on each monthly payment as it arrives. Withdrawals from a traditional IRA are taxed when taken out, while qualified Roth withdrawals are tax-free.

Worked Example: The Younger Growth Investor

A 30-year-old wants to build wealth over 35 years and does not need income today. For this investor, giving up upside in exchange for current income is usually a poor trade.

A broad index fund such as an S&P 500 or Nasdaq-100 ETF keeps the full growth of the market and is far more tax-efficient in a taxable account. FRC’s comparison of SCHD vs VOO shows how a growth fund compares with an income fund.

This investor might consider JEPI or JEPQ later in life, when the goal shifts from building wealth to drawing income. The funds are tools for a particular stage and purpose, not universal holdings.

Can You Own Both?

Some investors hold JEPI and JEPQ together. JEPI provides a defensive S&P 500 base, while JEPQ adds higher income and technology exposure.

Combining them spreads the options income across two different indexes. Because the Nasdaq-100 and the S&P 500 overlap heavily in their largest companies, the diversification benefit is real but limited.

The right mix depends on your income needs, your tolerance for swings in value and how much technology exposure you already have elsewhere. Investors who already hold a Nasdaq-heavy growth fund may find JEPI adds more balance than JEPQ.

The Risks to Understand

Both funds carry stock market risk and will fall when their underlying markets fall. Their option income cushions declines but does not prevent them.

Both carry the opportunity cost of capped upside. In strong rallies, investors in plain index funds will usually earn more.

Both carry the credit risk of the banks issuing their equity-linked notes, and both can see their income fall when volatility drops. JEPQ adds concentration risk, because of its heavy weighting in technology companies.

Other Income Funds Investors Compare

JEPI and JEPQ are not the only covered call ETFs. Other popular funds include those that sell options on the S&P 500 or the Nasdaq-100 using different methods, such as writing options directly rather than through ELNs.

Each fund’s approach affects its income, upside and tax treatment. Some funds that write index options directly may receive different tax treatment on their option income.

FRC’s covered call ETF guide, linked at the top of this page, compares JEPI, JEPQ and SPYI. Reading each fund’s prospectus explains exactly how it generates income.

Is Your Money Safe in JEPI or JEPQ?

Both funds are regulated investment companies overseen by the SEC, with their assets held by an independent custodian. J.P. Morgan Asset Management is part of JPMorgan Chase, one of the largest financial institutions in the world.

When you hold either fund at a SIPC member brokerage, your account is protected up to $500,000, including $250,000 in cash, if the brokerage fails and assets are missing. This protection does not cover market losses or the performance of the equity-linked notes.

FRC’s guide to whether your money is safe in a brokerage account explains these protections. Like all stock funds, both JEPI and JEPQ will rise and fall in value.

Common Misunderstandings

One misunderstanding is that a high yield means a high total return. Both funds trade part of their growth for income, so their total return can trail plain index funds in rising markets.

Another is that the monthly income is fixed. It changes every month with market volatility and can fall noticeably in calm markets.

A third is that the income is taxed like ordinary dividends. Most of it is taxed as ordinary income, which can make a large difference in a taxable account.

Keep Learning

Income ETFs such as JEPI and JEPQ are powerful tools when they match your goals, and costly mistakes when they do not. Understanding where the income comes from and how it is taxed is the key to using them well.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes, so you can open any term, such as derivative, and go deeper whenever something is unclear.

FRC’s programs and memberships are open to everyone. FRC’s Investing for Beginners guide is a natural next step if you are building a complete portfolio around your income needs.

Your Next Step

JEPI and JEPQ both pay high monthly income by owning stocks and selling call options, at the same 0.35% fee. JEPI is the more defensive choice built around lower-volatility S&P 500 stocks, while JEPQ offers higher income and more growth potential from the technology-heavy Nasdaq-100, with more volatility.

Decide how much income you need, how much volatility you can accept and which account you will hold the fund in, then choose the fund, or the combination, that fits your plan.