Dividend‑paying stocks have long been a cornerstone of many investment strategies. They provide regular cash distributions for investors in need of an income from their investments, while dividends can also cushion total returns in choppier markets by adding a more dependable return stream. And because dividends are often paid by more mature, financially sound companies, dividend strategies can provide a potentially more conservative way to access stock market growth.

But dividend ETFs are not the only way to get an income from equities. And they may not always be the most effective way. Other equity income ETF strategies can offer a potentially higher and more consistent income—and one that doesn’t require focusing only on stocks that pay dividends. That’s where equity premium income strategies come in: by collecting options premiums, they can target attractive, consistent monthly payouts that don’t rely solely on dividends and don’t rely on a relatively narrow choice of dividend-paying companies.

At J.P. Morgan Asset Management, our Equity Premium Income Active ETFs, for example, combine actively managed equity portfolios with an innovative options overlay strategy that’s designed to provide attractive monthly payouts, as well as participation in some equity market upside. These income ETFs may seem novel, by selling options contracts on our equity holdings, and using the premiums raised to generate extra income. But this approach has a long and successful track record providing a high and regular income for investors. And, while the strategy caps participation in rising markets, it does offer several potential advantages over dividend ETFs.

How do our Equity Premium Income Active ETFs work?

All of our Equity Premium Income Active ETFs leverage the fundamental research insights of J.P. Morgan Asset Management’s equities platform, providing access to a range equity portfolios focused on either global equities (MSCI World), US equities (S&P 500), European equities (MSCI Europe) or technology stocks (Nasdaq-100).

Income is generated from dividends, supplemented by an options overlay strategy that collects premiums from the sale of index call options on the underlying equity portfolios. Within the distributing share classes, all of the income from the premiums received is paid out as income every month, in addition to any dividends from the equity holdings in the portfolios.

The income, of course, is not guaranteed (as it isn’t with dividend ETFS), but Equity Premium Income ETFs are not limited to only owning dividend-paying stocks, or forced to buy the highest dividend-payers to boost income, which sometimes means owning lower-quality or more cyclical stocks that can be more volatile. Instead, they can diversify their exposure across the markets that they cover, actively targeting those higher-quality stocks that can help reduce volatility in the long run.

Our Equity Premium Income Active ETFs are also able to target a higher and more consistent income, as the regular collection of premiums from our disciplined options overlay strategy has the potential to generate more income—and more stable payouts—than relying on dividends alone.

What do we mean by selling index call options?

While options can sound complex, our approach is straightforward: by agreeing to give up index gains above a set level within a set period, the Equity Premium Income ETFs earn a steady flow of ‘premiums’ – immediate income paid for the right to exercise that option – which supplements the income from dividends.

By selling call options on its holdings, these ETFs can therefore earn extra income in exchange for capping some upside.

Turn volatility to your advantage

One particularly interesting feature of our Equity Premium Income Active ETFs is their potential to generate more income in volatile markets—exactly when investors most want some cushion against fluctuating prices. Because call options are sold every week to adapt to changing market conditions, when volatility spikes, the options can potentially be sold for higher premiums. Which means higher income payouts for investors. At the same time, the lower-volatility, low-beta underlying equity portfolios would be expected to provide a smoother experience when volatility strikes compared to the broader equity markets.

The compromise is that in sharp equity market rallies, the Equity Premium Income Active ETFs are not likely to match the returns of the broader market, due to the combination of the options strategy capping upside performance and the lower-beta portfolio. Investors need to be comfortable with this trade-off. However, rather than chasing returns, these ETFs can help investors to seek a better balance between income, equity market participation and downside risk mitigation. In addition, while the options strategy adds complexity, the premiums generated provide a differentiated source of income compared to dividend income, which varies by stock, or income from bonds, which may be more dependent on interest rate movements.

The combination of income, defensive equity exposure and a focus on total returns allows our Equity Premium Income Active ETFs to perform a variety of roles in a portfolio:

• Alternative to dividend strategies: Target an income from more diversified equity portfolios that are not constrained to dividend-paying stocks.
• Defensive, lower-volatility exposure: The lower-beta approach can reduce overall market risk while still capturing a portion of the equity market’s upside.
• Diversified equity allocation: Risk is spread broadly across sectors to avoid over concentration in certain areas of the market.

Global, US, Europe or tech – the choice is yours

While dividend ETFs remain valuable tools for generating regular cash flows and gaining equity market exposure, there’s more to equity income than dividend ETFs. J.P. Morgan’s Equity Premium Income ETFs can access options premiums to generate an attractive regular income in addition to dividends. And with four different markets covered, there are now more flavours of income to choose from.

Discover how the combination of actively managed defensive equity portfolios and an options premium strategy can enhance income distributions and provide access to lower-volatility returns. These ETFs involve more complex investments, so if you’re not clear how they work and the trade-offs involved, you should seek professional investment advice. However, as we’ve explained, they can provide useful tools for income investors to consider. So, when looking for equity income, don’t automatically reach for dividend ETFs. Go premium instead.