Turning More Cautious On The Mag 7, Prefer JEPQ Over QQQ

It has been an incredible run for the broad stock market since late October last year. Small caps led the year-end rally as a broadening out of 2023’s rally was a welcome development for many value investors and those owning risk-on cyclical stocks. The growth trade was not done, however. Despite a garden-variety pullback from late July through the early part of the fourth quarter, the Magnificent Seven returned to favor starting around the holidays. But we have also seen divergence among that handful of glamour stocks. Tesla (TSLA) has tumbled, while Apple (AAPL) has traded relatively poorly compared to the S&P 500 in the last few months.

Amid these moving pieces and periodic rotations across the global equity market, I expect a consolidation of gains within large-cap tech. Hence, I would rather own the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ) over the Nasdaq 100 ETF (QQQ) heading into the final month of Q1. Recall back in October, I made the case that going for an aggressive stance favoring QQQ over JEPQ appeared as the right strategy. QQQ has produced more than 300 basis points of alpha compared to JEPQ over that stretch.

Going forward, however, I prefer a long JEPQ play over long QQQ.

QQQ Has Outperformed JEPQ Since Early-October 2023

According to the issuer, JEPQ generates income through a combination of selling options and investing in US large-cap growth stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. The ETF aims to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility, and its construction includes using a long equity portfolio through a proprietary investment approach designed to drive portfolio allocations while maximizing risk-adjusted expected returns.

What is somewhat unattractive about JEPQ today, though, is that implied volatility on the Nasdaq 100 Index is muted. While a point off the low, the VXN near 18 suggests that investors are not placing much value on puts and calls on the QQQ ETF. Normally, I would like to see higher implied volatility, in which case JEPQ can collect greater option premium income. Still, if we indeed experience sideways to downward price action in the Nasdaq 100, the JEPQ would likely outperform.

Nasdaq 100 Volatility Index: Implied Volatility Remains Low, Under 20

Consider the time of year. March has historically featured its share of volatility (think: 2000, 2009, 2020, 2022, 2023). I do concede that the usual bearish stretch that begins around Valentine’s Day has not played out, so the bears are not performing well during what is often their time of year.

QQQ Seasonality: Some Bearish Risk Early in March

But it’s possible that since we are now through the heart of earnings season, the focus will shift from strong corporate profits among names like AAPL, Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Meta Platforms (META), and of course NVIDIA (NVDA) to the macro.

Should signs of weaker consumer and enterprise demand reveal themselves, alongside additional signs of stubborn inflation, then surely high-P/E large-cap tech would see some profit-taking. As it stands, the Information Technology sector is now stretched on valuation at 28 times forward earnings estimates, according to Goldman Sachs, near cycle highs.

S&P 500 Sector Valuation: Info Tech Turns Pricier, But With High Growth

As for an update on the JEPQ, its AUM has nearly doubled since I last reviewed the fund. Now a $10.4 billion ETF (compared to $5.7 billion as of early October last year), this income fund continues to attract new money. And what’s not to like? Share-price momentum has been excellent, earning JEPQ an A- ETF grade by Seeking Alpha, while its annual expense ratio is not all that high at 0.35%.

With a trailing 12-month dividend yield of 9.3%, yield-hungry investors who also want exposure to large-cap growth stocks in the Nasdaq 100 can get their fill with this ETF. Risk metrics are stellar and JEPQ is highly liquid given its average daily trading volume of more than 2.5 million shares. As partly a result of its remarkable run, JEPQ is the number one ranked ETF in its Asset Class as of February 23, 2024.

JEPQ: Portfolio & Dividend Information

The Technical Take

JEPQ remains in a powerful uptrend ever since the fund bottomed out in early 2023. Notice in the chart below that shares initially found resistance near the $45 mark during a rally early last year. Shares then pulled back after approaching $50 this past summer. A textbook correction of 10% brought the ETF back to key support in the mid-$40s, though the long-term 200-day moving average was breached in late October 2023. Still, the bulls defended $45, and a swift year-end rally helped JEPQ climb to fresh highs before the year was out. Technicians like to say, “What was resistance becomes new support,” and that should be the case with JEPQ – keep your eye on the $50 mark if we do see a retreat in the broad market.

Also, take a look at the uptrend support line from the $44.95 low four months ago – that comes into play just shy of $52. If we lose that, then a test of $50 support becomes all the more likely. Also concerning me today is that the RSI momentum oscillator at the top of the chart has printed a series of lower highs, while JEPQ’s share price has increased. That is a bearish divergence in the eyes of technical analysts – a cautionary signal.

Overall, the chart is solid, though some downside risk is mounting.

JEPQ: Key Support at $50, Rising Long-Term Trend

The Bottom Line

With my more cautious stance on the market heading into the tail end of the first quarter, I prefer owning JEPQ to QQQ today. Now, you could just sit on the sidelines altogether, but remaining invested is important so that drastic portfolio shifts are not constantly made. This is a reversal of the idea I outlined in October last year.