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In April, I wrote a cautious article on the YieldMax Universe Fund of Option Income ETFs (NYSEARCA:YMAX), warning readers that although the YMAX ETF had strong returns out of the gate and paid a very high distribution yield, investors are still exposed to the fundamental flaw of the covered-call options strategy, namely, capped upside/uncapped downside.
Since my article, YMAX’s returns have turned sour, as some high-flying single stocks in YMAX’s portfolio have taken a tumble, leaving YMAX’s share price down 22% in a matter of months (Figure 1). Fortunately, the YMAX ETF was still able to collect premium income during this time, so total returns were less of a disaster, at -8%.
Figure 1 – YMAX has returned -8% since April (Seeking Alpha)
With 8 months of operating history, I believe we can start to draw some conclusions about YMAX’s strategy and performance.
In my opinion, YMAX’s strategy of buying a portfolio of covered-call funds is not the same as buying a covered-call on a diversified portfolio of stocks. In the latter case, a diversified portfolio of stocks is mostly uncorrelated, and single-stock risks cancel out. However, in YMAX’s case, the fund is basically making bets on 22 single stocks every month using covered-calls.
When the bets are ‘right’, the single-stock covered-call limits upside. When the bets are ‘wrong’, the single-stock covered-call loses almost as much as the underlying stock. This is a long-term loser’s game.
Brief Fund Overview
The YieldMax Universe Fund of Option Income ETFs is a ‘fund-of-fund’ of YieldMax single-stock ETFs. YieldMax has been very successful in raising capital with the allure of high double-digit yields, with the YMAX ETF now having over $240 million in AUM, more than double the figure from April (Figure 2). YMAX charges a 0.29% management fee in addition to the 0.99% management fee charged by the underlying YieldMax single-stock ETFs.
Figure 2 – YMAX overview (yieldmaxetfs.com)
To understand the flaw in YMAX’s strategy, we must first explain how the YMAX ETF and the underlying YieldMax single-stock ETFs are constructed.
All YieldMax single-stock ETFs have the basic structure of holding a synthetic long exposure (long call/short put) on single-stocks such as Airbnb Inc. (ABNB) in the YieldMax ABNB Option Income Strategy ETF (ABNY) or Apple Inc. (AAPL) in the YieldMax AAPL Option Income Strategy ETF (APLY).
In total, YMAX holds 22 such single-stock ETFs, although in addition to the YieldMax MSTR Option Income Strategy ETF (MSTY), YMAX appears to hold additional MSTR calls and puts (Figure 3).
Figure 3 – YMAX portfolio holdings (Author created from holdings file from yieldmaxetfs.com)
Against the synthetic long exposure, each single-stock YieldMax ETF will write short-dated call options to ‘harvest’ the option income using a ‘covered-call’ strategy. For example, in the ABNY ETF, the synthetic long on ABNB is created using October 2024 expiry options while the fund has written weekly options expiring September 24th to harvest income (Figure 4).
Figure 4 – ABNY portfolio holdings (yieldmaxetfs.com)
Capped Upside/Uncapped Downside Is The Main Flaw
By itself, the covered-call strategy is not necessarily bad, as it mainly trades off stock upside for option premium income upfront while retaining most of the downside of holding the stock.
Many successful income funds like the JPMorgan Equity Premium Income ETF (JEPI) use the covered-call strategy to provide thousands of investors with stable monthly income.
However, over the long run, the covered-call strategy is likely to underperform, as it generally cannot keep up with the total returns of an uncapped equity market, since stocks rise in the long-term (Figure 5).
Figure 5 – JEPI has underperformed S&P 500 in the long-run (Seeking Alpha)
The issue I have with YMAX is that YieldMax pushes the covered-call strategy to the extreme by deploying it on single-stocks. While a broad basket of stocks, say the S&P 500 Index, is highly unlikely to decline by more than 30% in any given year (unlikely, but it does happen from time to time!), single stocks can and do rise and fall by 30-50% routinely.
For example, ABNB’s shares have crashed by 30% in recent months (Figure 6).
Figure 6 – ABNB shares have declined by 30% in recent months (Seeking Alpha)
ABNY, being a covered-call fund on ABNB, has declined by 18% since its inception in June compared to a -24% decline in ABNB shares, or ~75% downside capture (Figure 7).
Figure 7 – ABNY has nearly matched ABNB’s downside in recent months (Seeking Alpha)
On the other hand, when single stocks rise, they do so in a non-linear fashion, and selling short-term upside may cause significant underperformance. For example, AAPL shares have risen by 13% in the past 3 months, but the APLY ETF only rose by 6% because it has sold away upside on AAPL shares, or 46% upside capture (Figure 8).
Figure 8 – APLY has less than 50% upside capture on AAPL shares (Seeking Alpha)
By focusing on a portfolio of highly volatile stocks like Coinbase (COIN), MicroStrategy (MSTR), Nvidia (NVDA), and ABNB, the YMAX ETF may be setting up investors for underperformance as it is basically making a series of risky bets every month.
When its bets are ‘right’ and the stock rallies, say ABNB rallying 10% after a good earnings report, the YMAX ETF (through its holding of ABNY) will underperform because it has sold away upside. On the other hand, when it is ‘wrong’ and ABNB plummets 10% after a bad earnings report, the YMAX ETF (through ABNY) will decline almost as much ABNB.
This is a long-term loser’s game, as individually, each of these covered-call positions is akin to a roulette gambler going to a casino and betting on red. Since the odds are stacked against the gambler (i.e. covered-call is skewed to underperformance with more downside than upside), then on average, an investor (i.e. YMAX) making a lot of these bets in a portfolio will become net losers since a single slip-up can cause significant losses for the fund (i.e. loser’s game).
Comparing YMAX To Established Income Funds
With 8 months of operating history, we can also start to compare the YMAX ETF against more established option income funds like JEPI, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), and the Global X NASDAQ 100 Covered Call ETF (QYLD). In terms of fund structure, the YMAX is by far the most expensive, charging a 1.28% all-in expense ratio compared to 0.35% for the JPMorgan products and 0.61% for QYLD (Figure 9).
Figure 9 – YMAX vs. peers, fund structure (Seeking Alpha)
YMAX’s main draw is its attractive distribution yield, with an annualized distribution yield of 42.4% based on its most recent distribution annualized. This is much higher than JEPI (7.3% trailing 12 months), JEPQ (9.9%), and QYLD (12.0%) (Figure 10).
Figure 10 – YMAX vs. peers, distribution yield (Seeking Alpha)
However, in addition to looking at YMAX’s yield, investors need to consider total returns. A high yield, with a shrinking share price, means investors’ total returns may be much lower (Figure 11).
Figure 11 – YMAX has a shrinking share price (Seeking Alpha)
Comparing total returns since YMAX’s inception in January, the YMAX ETF has only delivered a 4.8% total return, compared to 9.7% for JEPI, 8.8% for JEPQ, and 6.3% for QYLD (Figure 12).
Figure 12 – YMAX vs. peers, total returns since inception (Seeking Alpha)
Figure 12 also shows the YMAX ETF appears to have the highest volatility, with the fund’s total returns collapsing in the last few weeks as the equity markets face a pullback.
Overall, I believe the YMAX is a bull-market income fund that may be only suitable when markets are roaring and every stock is going up in a correlated fashion. In that scenario, YMAX should deliver a high yield from option premiums, while its NAV will not shrink due to single-stock declines.
When markets are more volatile and single stocks rise and fall in an uncorrelated fashion, YMAX’s portfolio of single-stock covered-calls may not perform the same as a covered-call on a diversified portfolio of single-stocks (i.e. JEPI) due to the loser’s game nature of its strategy.
Conclusion
The YieldMax Universe Fund of Option Income ETFs has delivered -8% total returns in the past few months, as equity markets suffered a pullback and individual stocks dived.
Without the tailwind of a ripping bull market, the flaw of YMAX’s strategy has been on full display. A portfolio of single-stock covered-calls is not the same as a covered-call on a diversified portfolio of stocks.
In a diversified equity portfolio like the S&P 500 Index, idiosyncratic risks are uncorrelated and cancel out, so a covered-call strategy on this portfolio faces mostly market downside risks.
On the other hand, YMAX makes 22 single-stock covered-call bets, each of which faces both single-stock risk and market risk. Over the long run, this is a loser’s game strategy, as a single bad catalyst from one of the 22 stocks can lead to significant losses for the fund, while a positive catalyst will be capped by the call options sold. I continue to recommend investors avoid the YMAX ETF.