1 High-Yield Dividend ETF to Buy to Generate Passive Income

Many sources of passive income require some level of activity, like managing a rental property or portfolio of stocks. Others are as passive as they come. You just sit back and watch the passive income flow into your account.

Exchange-traded funds (ETFs) offer a much more hands-off approach to generating passive income. One great option is the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). The ETF offers a high-yielding monthly-income stream, making it ideal for those seeking passive income.

A premium-income stream

JPMorgan Nasdaq Equity Premium ETF has a dual mandate. It seeks to deliver monthly-distributable income and exposure to the Nasdaq-100 index with less volatility.

The fund has an interesting strategy to generate income for its investors. It writes out-of-the-money call options on the Nasdaq-100 index. This strategy generates options-premium income that the ETF distributes to its investors each month. Options writing can be a very lucrative income strategy. Over the last 12 months, the ETF has offered a dividend yield of 9.7%. Meanwhile, its yield in the past 30 days is nearly 9.5%. That's a very attractive yield compared to other asset classes:

Image source: JPMorgan Asset Management.

As that graphic shows, the fund's yield over the past month is higher than high-yielding U.S. bonds (i.e., junk bonds). Its yield is also more than double that of other higher-yielding investment vehicles, like U.S. Treasury bonds and real estate investment trusts (REITs). It's also a lot higher than the average stock.

However, it's worth noting that the fund's monthly payment can vary significantly:

JEPQ Dividend data by YCharts.

That's because the income it generates fluctuates based on volatility. The more volatile the market, the higher options premiums tend to be. So, as a seller of options, it can collect more premium income when volatility is higher. However, even in a low-volatility market, the ETF should still generate a lot of income because the Nasdaq-100 is a more volatile index than the S&P 500 due to its focus on growth stocks.

Equity exposure with less volatility

JPMorgan Nasdaq Equity Premium ETF offers more than just passive income. The fund also provides lower volatility equity-market exposure. It does that by holding an underlying equity portfolio selected by the fund's managers based on data science and fundamental research.

The ETF holds many of the stocks listed in the Nasdaq-100 index. However, it doesn't have the same weighting as those stocks in the index. That can benefit or detract from its returns, depending on what the underlying holdings did in a particular period.

For example, the ETF underperformed the Nasdaq-100 during the third quarter (1.6% total return compared to 2.1%). An overweight weighting to Oracle (NYSE: ORCL) added to its results in the period. The technology company reported strong cloud-infrastructure revenue and set new long-term targets significantly above expectations. With the technology company expected to grow faster in the future, it could continue to add to the fund's results. Meanwhile, the fund didn't have a position in Moderna, which also added to its results in Q3 due to the biotechnology stock's underperformance. On the other hand, an overweight position in Lam Research and an underweight position in Tesla detracted from its results during Q3.

The ETF will likely underperform the Nasdaq-100 during strong market periods. However, it should outperform during more volatile times. That helps make it a lower-risk way to invest in the top-growth stocks in the Nasdaq-100.

Premium-passive income and upside potential

JPMorgan Nasdaq Equity Premium ETF pays its investors very well. It generates options-premium income that it distributes to investors each month. On top of that, it holds a portfolio of high-quality equities that should grow in value. That combination should enable investors to earn a lot of passive income and a strong total return with less volatility over the long term, making it an attractive ETF to buy.

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Matt DiLallo has positions in JPMorgan Nasdaq Equity Premium Income ETF and Tesla. The Motley Fool has positions in and recommends Lam Research, Oracle, and Tesla. The Motley Fool has a disclosure policy.