A reader from Wealthy Retirement recently reached out, asking me to dive into the dividend safety of the YieldMax Magnificent 7 Fund of Option Income ETFs (NYSE: YMAG), known for its striking 39% yield. This fund stands out because it issues dividends on a weekly basis. In a bit, I’ll explain how the YieldMax ETFs operate. However, it’s important to understand that the dividend isn’t fixed, so you can’t bank on a consistent income on an annual, monthly, or weekly basis.
Here’s a visual that captures the fluctuations in weekly dividends over the past three months.
As you can see, it’s quite predictable that dividends will rise and fall throughout the year, and even within the same month. A dividend that varies will always receive an “F” for safety because of these frequent dips. This ETF, unsurprisingly, follows that trend.
The question opens a broader conversation about YieldMax ETFs. These funds offer incredibly high yields on some of the stock market’s favorites, like Tesla (Nasdaq: TSLA), Apple (Nasdaq: AAPL), Super Micro Computer (Nasdaq: SMCI), and MicroStrategy (Nasdaq: MSTR), just to name a few. They tend to catch onto any stock that’s currently popular.
However, YieldMax doesn’t purchase these stocks directly. Instead, they utilize a strategy involving options: they buy a call, sell a put on the stock, and then sell a call, which essentially creates what’s known as a synthetic covered call. They also buy Treasury securities to further bump up their income and sky-high yields.
And I really do mean sky-high.
The YieldMax TSLA Option Income Strategy ETF (NYSE: TSLY) boasts a yield of 118%. Yes, you read that correctly—118%. Compared to that, the YieldMax NVDA Option Income Strategy ETF (NYSE: NVDY) offers a more modest yield of 53%. Even the YieldMax MSFT Option Income Strategy ETF (NYSE: MSFO) seems understated at “just” 26%.
However, despite these substantial payouts, owning the actual stocks would ultimately result in higher returns than purchasing these ETFs.
There are a couple of critical points to consider before we delve into their performance.
First, complexity comes with a cost. While buying and holding stock is generally free with many brokerages, option trading, managing positions, and the fees for everyone involved, like traders, portfolio managers, and legal teams, incur costs. Typically, there’s around a 1% expense for holding these ETFs. While that’s not outrageously high, it does eat into your returns.
Second, there’s no such thing as free money on Wall Street. If it were truly possible to earn 26%, 53%, or even 118% on these positions risk-free, hedge funds and institutional investors would snap them up before any retail investor could even click their mouse. High yields often signal higher risks, endeavoring to lure investors into precarious situations or simply to collect fees.
Looking back at November, when I examined all of YieldMax’s single-stock option income ETFs, a trend was clear: nearly all of them didn’t match up to the performance of their respective stocks, even when factoring in the vast yields.
Here are a few updated figures for the full year of 2024, including dividends.
Even with the Tesla ETF boasting a yield of over 100%, it fell short of Tesla’s stock by over 30 percentage points. The Nvidia ETF fell behind by 53 percentage points, and Microsoft’s ETF lagged by more than 1.5 percentage points. Remember, these returns account for the large yields paid out.
What about when stock prices decline? Can robust yields compensate for losses? Unfortunately, not.
Take Moderna (Nasdaq: MRNA) as an example; it was among the few stocks covered by YieldMax that faced decline in 2024, losing 57.9%. Meanwhile, the YieldMax MRNA Option Income Strategy ETF (NYSE: MRNY) dropped 59.3%, despite distributing $9.39 per share in dividends. This payout, equating to a 39% yield based on the December 29, 2023, closing price, couldn’t prevent the ETF from delivering worse results than simply holding the stock.
To put it plainly, chasing these high yields is a mistake. Avoid buying YieldMax ETFs or similar instruments. They simply aren’t wise investments.
