Why I Can't Stop Buying This Ultra-high-yielding Etf

I love generating passive income. I currently use that income to make more income-generating investments. My goal is to eventually make enough income from passive sources to cover my routine living expenses. That will remove the stress of having to work to pay the bills, making me much more financially independent.

I have a long way to go, which is why I continue to make additional income-generating investments when I have cash to spare. One place I have been plowing that money into is the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). I recently bought more shares of the high-yielding exchange-traded fund (ETF) and plan to buy even more in the coming months.

A premium passive income producer

JPMorgan Nasdaq Premium Income ETF is a rather unique ETF. It aims to deliver monthly distributable income and exposure to the high-growth Nasdaq-100 Index with less volatility.

The income comes from selling out-of-the-money call options on the Nasdaq-100 index. As an options seller, the fund gets paid the options premium, which is its price. It writes these options at a strike price above the index's current level (i.e., out of the money). If the index closes below the strike price at expiration, the fund gets to keep 100% of the income. The fund can roll the option forward if the index closes above that level, generating more income. It's a very repeatable income-generating strategy.

Options selling can also be a very lucrative income strategy. That's evident in the fund's current income yield. It has provided an attractive dividend yield of 9.9% over the past 12 months. Meanwhile, its yield over the last 30 days was an eye-popping 12.4%. That's a much higher income yield compared with other asset classes:

As that graphic shows, its annualized yield based on its last payment was much higher than high-yield US bonds (junk bonds). It was also significantly above other income-focused investments like the 10-year U.S. Treasury Bonds and REITs.

The ETF's income payment fluctuates from month to month based on the options premium income it generates:

JEPQ Dividend data by YCharts

Those payments tend to rise and fall based on volatility since higher volatility increases options premiums.

More than just income

The monthly income stream this ETF produces is the main draw. However, it's only part of the return. This ETF also offers equity exposure to many of the top stocks in the Nasdaq-100 index, which are some of the best growth companies in the world.

The ETF doesn't aim to track that index, like the Invesco QQQ Trust. However, it does hold many of the top stocks in that index. For example, its five largest holdings are:

• Apple: 7.5% of the fund's assets.
• Nvidia: 6.8%.
• Microsoft: 6.7%.
• Amazon: 4.9%.
• Broadcom: 4.5%.

Those are similar to the top holdings of the Invesco QQQ Trust. However, the fund does have slightly different allocations compared to their weighting in the Nasdaq-100 index. That can have some impact on its returns. For example, the ETF underperformed the Nasdaq-100 in the third quarter due in part to being overweight in Lam Research and an underweight position of Tesla. However, it also benefited from not having a position in Moderna and being overweight Oracle, which positively affected its returns in the period.

Overall, the fund has delivered a solid total return, with 24.3% this year and 17.2% annualized since inception, compared with 25.3% and 21%, respectively, for the Nasdaq-100. The returns have added up. A $10,000 investment in this ETF at inception has grown to $11,320 today, while the income generated by the fund would have pushed the total value up to $15,080. That's a much higher total return than most income-focused investments would generate, meaning the fund can supply income and grow an investor's wealth at the same time. While the fund's equity market exposure also means it has some equity market risk in the form of volatility, it also benefits from volatility, which increases the value of the call premiums on the Nasdaq-100.

A great ETF for generating income and growing wealth

JPMorgan Nasdaq Equity Premium Income ETF is growing into one of my favorite funds for generating passive income. It pays a lucrative monthly distribution that I expect will grow over time as the value of the fund's holdings rise, driven by its focus on the high-growth Nasdaq-100. That combination of income and growth should enable me to reach financial independence faster, which is why I don't plan to stop buying more shares of this ETF anytime soon.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matt DiLallo has positions in Amazon, Apple, Broadcom, JPMorgan Nasdaq Equity Premium Income ETF, Moderna, and Tesla and has the following options: short February 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Amazon, Apple, Lam Research, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends Broadcom and Moderna and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.