This unique ETF could be appealing to many income investors.
Nvidia (NVDA 0.80%) is a dividend stock but not one that will be attractive to many income investors. The chipmaker’s forward dividend yield is a puny 0.029%.
Is there a way to own shares of Nvidia and receive exceptional income? Actually, yes. Meet an exchange-traded fund (ETF) that is heavily invested in Nvidia and — believe it or not — offers an ultra-high yield of 8%.
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Nvidia and more
I won’t keep you in suspense. The ETF I’m referring to is the JPMorgan Equity Premium Income ETF (JEPI -0.27%). JPMorgan Chase launched the fund in May 2020 to give investors monthly distributions, exposure to equity markets, and relatively low volatility.
This ETF is indeed heavily invested in Nvidia. The stock is currently its second-largest holding but is neck-and-neck with Trane Technologies for the top spot.
The JPMorgan Equity Premium Income ETF owns a total of 133 stocks. Its other top holdings include Progressive, Southern Company, Meta Platforms, Mastercard, and Amazon. Nearly 15% of the portfolio is invested in information technology stocks. The fund also owns stocks representing 11+ other sectors.
Unlike many ETFs, this one doesn’t seek to track the performance of an index. Its portfolio is built based on what JPMorgan Chase calls a “time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings.”
This stock selection process has worked pretty well. Since its inception, the JPMorgan Equity Premium Income ETF has delivered an average annual total return of close to 13.4%.
About that ultra-high yield
You might be wondering how the ETF can pay such a juicy yield. After all, most of the top holdings mentioned don’t offer attractive dividend yields. Amazon doesn’t pay a dividend at all. The lone exception is Southern Company, but its forward dividend yield of 3.06% is well below the JPMorgan Equity Premium Income ETF’s 30-day Securities and Exchange Commission (SEC) yield of 8%.
There’s a simple answer: derivatives. The ETF writes out-of-the-money call options on the S&P 500 to generate income. These options give the buyer the right (but not the obligation) to buy the S&P 500 at a price higher than the current price. This approach allows the JPMorgan Equity Premium Income ETF’s yield to handily beat what you can get with S&P 500 ETFs, U.S. Treasury bonds, or most global real estate investment trusts (REITs).
Morningstar awarded the JPMorgan Equity Premium Income ETF five stars for its derivative income category of funds. That’s the highest rating possible.
Granted, the ETF’s expense ratio of 0.35% doesn’t reflect extraordinarily low costs. However, it’s important to note that the 30-day SEC yield of 8% is after all expenses.
Those expenses include paying the ETF’s two exceptional portfolio managers. Hamilton Reiner has 37 years in the financial industry, 15 of which were at JPMorgan Chase. Raffaele Zingone has worked in the industry for 33 years, all of them at JPMorgan Chase. Both men have managed the JPMorgan Equity Premium Income ETF since its inception.
The inevitable caveats
Now for the inevitable caveats required with any discussion of this ETF. Most importantly, the fund might not perform as well in the future as it has in the past. The stock market has skyrocketed over the last four years, a relatively short period that isn’t necessarily representative of realistic returns over the long term.
On a similar note, the impressive yield you can currently receive with the JPMorgan Equity Premium Income ETF might not always be so high. The yield has been significantly lower at times since the ETF was launched.
Also, if you want to own a stake in Nvidia via an ETF, there’s no guarantee this JPMorgan fund will always be invested in the chipmaker. The ETF’s turnover ratio (the percentage of the fund’s holdings that are sold and replaced with new stocks) over the 12 months ending June 30, 2024, was 174%.
Still, the JPMorgan Equity Premium Income ETF could appeal to many income investors. If you want to own a position in Nvidia and enjoy a sky-high yield, this just might be the best alternative around.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon, Mastercard, and Meta Platforms. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Mastercard, Meta Platforms, Nvidia, and Progressive. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.