Active ETFs have quickly become a force in investment management – and investment bank J.P. Morgan has been a leading figure in that movement. With one of the largest suites of active ETFs, J.P. Morgan has quickly gathered assets and found its ETF products among a variety of investors’ portfolios. This includes its $29 billion runaway hit, the JPMorgan Equity Premium Income ETF (JEPI).
It seems that rivals also want a piece of the action.
Investment bank Goldman Sachs can be counted among those rivals. Goldman recently filed for two ETFs that look very similar in style and structure to J.P. Morgan ETFs, including JEPI. The question is whether or not Goldman can achieve the same kind of success.
JEPI’s Huge Inflows
Launched in 2020, JEPI only had around $170 million in assets after its year of trading. However, since then, the fund has seen billions in inflows, boosting its assets and making it not only the largest active ETF, but one of the largest ETFs of any kind. Not to be outdone, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) has gathered a very respectable $4.56 billion in assets.
The key for the two funds has been their active strategies.
Both ETFs write covered calls and use an option overlay on stocks within their respective universes. For JEPI, this is dividend stocks in the S&P 500. For JEPQ, it’s growth stocks with the NASDAQ. J.P. Morgan uses active security selection of both ETFs’ underlying holdings, then writes the options.
Writing call options can be a great way to generate extra income as investors are paid a premium for writing the option. The downside is if the stock surges and the option is exercised, investors cap their gain potential.
The proof is in the pudding. Both ETFs yield far more than their respective indexes and both have performed well over the year, with the smaller JEPQ having the edge on both yield and year-to-date return.
Goldman’s Copy Cats
With a recent filing, Goldman Sachs hopes to take away some of J.P. Morgan’s thunder in the two funds.
According to the new SEC filing, the Goldman Sachs U.S. Equity Premium Income ETF will be very similar to JEPI. The future ETF will invest at least 80% of its assets in equities that are actively chosen from its benchmark. The ETF will then sell call options on a percentage of the equity investment’s market value. Here, active management comes into play again as Goldman will vary the options overlay between 25% and 75% of assets depending on market conditions. Goldman’s other new ETF – the Goldman Sachs U.S. Tech Index Equity Premium Income ETF – will function the same way but use a different benchmark, presumably, the NASDAQ. 1
The way Goldman hopes to differentiate itself from J.P. Morgan’s ETFs comes down to the options overlay strategy. J.P. Morgan’s ETFs use equity-linked notes (ELNs). The use of ELNs allows JEPI and JEPQ to synthetically mimic the usage of out-of-the-money covered call options. The ETFS themselves don’t actually write the options.
Goldman’s ETFs will use Flexible Exchange Options, or FLEX options. These non-standard options allow for both writers and buyers to negotiate various terms like strike price. As such, they will allow Goldman to take more aggressive or conservative positions as they see fit.
The final difference is Goldman’s new ETF’s ability to become 100% defensive. If things are really bad, the funds can sell all their positions and buy U.S. short-term Treasury bills to ride out the storm. J.P. Morgan funds will stay invested in their holdings.
A Surge of Active Covered Call Funds
The question is whether or not Goldman Sachs’ new funds will be a hit with investors and if the difference in strategy will help with returns. The answer may be mixed. It’s hard to back-test active strategies since human decisions change outcomes. Goldman does have a big advantage for its funds – and that’s bring your own assets. As one of the largest asset managers and massive advising networks, Goldman could swing more of its clients into its funds, which is exactly what J.P. Morgan did.
There will certainly be a lot of competition. Passive covered call ETFs have existed for quite some time now, and in recent quarters, there have been plenty of newly launched covered call ETFs on the market. Issuers, including Global X, First Trust and Amplify, have all launched covered call ETFs and have gathered plenty of assets.
Covered Call ETFs
| Ticker | Name | AUM | YTD Price Ret (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|
| KNG | FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF | $735.1M | 131.3% | 0.75% | ETF | No |
| JEPQ | JPMorgan Nasdaq Equity Premium Income ETF | $3.887B | 20.4% | 0.35% | ETF | Yes |
| NUSI | Nationwide Nasdaq-100 Risk-Managed Income ETF | $455.1M | 17.1% | 0.68% | ETF | Yes |
| QYLD | Global X NASDAQ 100 Covered Call ETF | $8.085B | 12.9% | 0.6% | ETF | No |
| PBP | Invesco S&P 500 BuyWrite ETF | $98.2M | 10.9% | 0.49% | ETF | Yes |
| IDVO | Amplify International Enhanced Dividend Income ETF | $22.2M | 10.3% | 0.65% | ETF | Yes |
| DIVO | Amplify CWP Enhanced Dividend Income ETF | $2.91B | 3.4% | 0.55% | ETF | Yes |
| JEPI | JPMorgan Equity Premium Income ETF | $27.856B | 2.6% | 0.35% | ETF | Yes |
Time will tell if Goldman’s funds will have enough differences to produce better returns than J.P. Morgan’s ETFs or any of the other funds on the market. However, Goldman’s ability to bring its own assets from its advising clients should help the funds get some traction.
The Bottom Line
J.P. Morgan’s two active covered call ETFs have become runaway hits as investors look to boost their income and limit downside risk. It’s not surprising that the ETFs have inspired numerous copycat funds. This includes Goldman Sachs’ latest two ETFs. With different strategies and added differences, its funds could be big winners as well.
1 SEC (June 2023). Goldman Sachs ETF Trust, SEC Form N-1A Registration Statement