As a
first-time investor, researching on what financial instruments to invest in, I
narrowed my options to two technology ETFs, JEPQ and QQQ. QQQ tracks the NASDAQ
100 index, meaning its fluctuations are tied to that of the NASDAQ 100. JEPQ
tracks some of the top stocks in the NASDAQ 100, and sells covered calls to
generate monthly dividends for investors. On paper, it seems like JEPQ is for
more conservative investors, capping the potential gains with the calls, but
also insuring against sharp falls. QQQ, on the other hand, is subject to the
whims of the market, with the potential for large gains, but also the risk of
steep falls. I wanted to leverage my expertise with data, and see if there were
any patterns or trends that I could spot, that would give me a better chance of
having success with my investments. For this, I used the daily price data for
JEPQ and QQQ from May 4th, 2022, to December 25th, 2025.
If I
invested on Day 1, what would be my total return on Day x
To answer this question, I
took the cumulative returns of JEPQ and QQQ. Looking at the big picture, we can
see that despite JEPQ holding high-performance stocks and paying out dividends,
QQQ shows a greater increase in returns over a longer-term period.
This is
because selling options to generate short term income caps the upside of JEPQ. In
a bull market, QQQ captures 100% of the increase, allowing its growth to
compound. JEPQ hits its call strike on
those specific days, meaning that despite creating immediate income by selling
the shares through calls, the long-term growth of the fund is hindered by the
necessity of fulfilling the calls. I also found that both funds have a strong
negative correlation with volatility (VXN) spikes. When market risk increases,
both QQQ and JEPQ take a hit. The presence of a covered call does not allow
JEPQ to completely escape the loss-making trend. However, JEPQ does protect
against the high losses that QQQ can face. When calculating the capture ratios,
I found that JEPQ captures about 66.8% of QQQ’s upside on good days, and 69.1%
of QQQ’s downside on bad days. This shows that while JEPQ may not give the same
upside that QQQ does, it also does not completely sink to the lows that QQQ
can.
Now that I found how each fund performed over a long-term
period, I wanted to figure out when to invest.
So, I decided to try and identify
some more granular trends. I used the QQQ data, because it is a superset for
JEPQ, and as such, can also serve as a proxy for the trends observed in the
JEPQ fund. I applied a 63-day centered moving average (roughly one trading
quarter) to smooth out the daily noise. By finding the local maxima and minima
of the smoothed curve, I divided the timeline into distinct Market Expansions
and Market Contractions.
Once he phases were mapped, I
calculated the exact slope (the rate of change) for both QQQ and JEPQ between
those turning points. From this, I found that during a Market Expansion, QQQ
accelerates aggressively. Its slope is incredibly steep. JEPQ steadily climbs
alongside it, but at a visibly flatter trajectory. During a Market Contraction,
QQQ’s slope plummets sharply. JEPQ also declines, but its slope is noticeably
less severe, which validates the previous conclusions that we found.
Overall,
QQQ is best for long term investors. Because of its inexorable rise, investing
in QQQ will eventually lead to returns, despite the fluctuations observed in
the short term. JEPQ is more suitable for conservative investors. The potential
gains are capped, and the losses are ameliorated by the dividend from the call
option. The monthly dividends also ensure steady cash flow.
To build upon this research,
given the observed correlation between the prices and the VXN level, I would
like to try to create a trading model to predict the state of the VXN and
whether to enter or exit the market based on the guidance of the model.
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