Why I Questioned JEPQ's High Returns and What You Should Know About Dividend Funds

"The JPMorgan Nasdaq Equity Premium ETF ( NASDAQ:JEPQ) is a case study in higher yields not always being better for investors. On the surface, JEPQ's 9.96% SEC yield looks like a compelling opportunity for investors. If you invest $100,000 into the fund, you will receive $9,960 in annual cash flow. Most dividend stocks and funds can't keep up with that type of yield."

"but JEPQ isn't the best way to do that. The ETF's 9.96% SEC yield sounds like a steal, but all of that cash flow comes from short-term options trading. All of the income from these trades is treated as ordinary income, and that will push up your tax bill. It can also push your Social Security checks to a higher tax bracket, which can reduce your benefits."

JEPQ advertises a near-10% SEC yield that is primarily produced by short-term options income rather than sustained dividend or capital appreciation. The fund targets monthly income and seeks to reduce volatility while providing Nasdaq 100 exposure, but the options-based strategy caps upside and limits participation in long-term index gains. Income from option trades is treated as ordinary income, increasing tax liabilities and potentially raising Social Security taxation. The reliance on option premiums, higher taxable distributions, and reduced growth potential present significant tradeoffs for investors focused on long-term wealth accumulation.

Read at 24/7 Wall St.