The combination of low dividend yields on broader domestic equity benchmarks, such as the S&P 500, and the spiking interest rates seen in 2022 and 2023 are among the reasons why the universe of options income exchange traded funds (ETFs) and assets under management tied to those funds exploded in recent years.
A population that as recently as 2020 was measured in just dozens – less than two dozen to be precise – with an AUM tally of about $10 billion is now measured in the hundreds with about $150 billion in assets under management.
(Chart Courtesy: J.P. Morgan Asset Management)
Not only is a growing corner of the ETF universe, it’s an evolving one, too. However, that evolution brings with it cautionary tales, particularly pertaining to high fee ETFs with jaw-dropping yields that do little more than return investors’ capital to them. Oh yeah, some of those funds have the potential to be more volatile than their underlying asset or index.
Still, there’s a case for some of the old guard of options income ETFs, such as the JP Morgan Equity Premium Income ETF (JEPI) and the JP Morgan Nasdaq Equity Premium Income ETF (JEPQ) – two of the most venerable funds in the category.
Options Income ETFs Having Their Moment(s)
As noted above, not options income ETFs are suitable for broad swaths of clients, but at a time when equity index yields are paltry and bond yields are volatile, sturdier covered call ETFs like JEPI and JEPQ are apt to have broad audiences.
“Today’s market environment is marked by ongoing uncertainty. Traditional fixed income investments, once a reliable source of yield, now face headwinds from interest rate fluctuations and heightened credit risk, and dividend yields alone may not satisfy the income needs of many investors as they hover near 20-year lows,” notes J.P. Morgan Asset Manager.
Believe it or not, the asset manager points out that since 2023, inflows to options income ETFs outpaced those to traditional dividend ETFs – a trend continuing in early 2026. Some of that momentum is attributable to (some) options-based ETFs being volatility avoidance concepts as well as income plays.
“At the same time, equity markets remain volatile and are likely to deliver more modest returns in 2026,” adds J.P. Morgan. “Against this backdrop, derivative income strategies have emerged as mainstream allocations in portfolios, offering the potential to generate attractive yield while managing risk.”
An Opportunity to Be Active
With standard income-generating assets, such as equities and fixed income, passive strategies are fine and relevant to an array of end users. However, options income ETFs are a different ballgame. Here, advisors and investors should embrace active management.
JEPI and JEPQ are two examples of actively managed options ETFs and that marriage of that management style with this asset class is pertinent for numerous reasons. Those include the ability of managers to potentially select better stocks that reside beneath the options overlay and the possibility of reducing volatility.
“Pairing an active equity portfolio with a disciplined options overlay helps avoid the pitfalls of market timing and delivers a more consistent outcome for investors. We believe that delivering a disciplined options strategy—selling the same types of call options (usually out-of-the-money calls on indices) on a consistent percentage of the portfolio, regardless of market environment—is likely to generate results that meet investor expectations across different markets,” concludes J.P. Morgan.