This unique fund uses options income strategies to deliver incredible income. But it isn’t without risk.
The YieldMax NVDA Option Income Strategy ETF (NVDY 0.91%) has received quite a bit of investor attention recently, and it isn’t hard to see why. Not only does it offer exposure to Nvidia (NVDA 3.97%), which is arguably the most popular stock in the market right now, but it also offers dividend income, and lots of it. In fact, as of this writing, the ETF has an incredible 77% dividend yield based on its past 12 months of payouts.
Of course, there’s no such thing as completely safe 77% annualized returns from any investment, so there are some things that are important to know before investing. Here’s an overview, and whether you might be better off just buying Nvidia stock instead.
How the ETF invests your money
It might surprise you to learn that the YieldMax NVDA Option Income Strategy ETF doesn’t actually own any Nvidia shares. It puts your money in Treasury securities and uses this as collateral to create income-generating option spreads. The fund’s managers will typically do a combination of buying and selling calls and puts to create the desired income and exposure to changes in the stock’s price.
The general effect is that:
- If the stock’s price rises gradually, the fund’s NAV will rise over time. This is the best-case scenario when selling covered calls in general.
- If the stock is flat or down, the fund’s NAV will decline but will likely outperform the price action in the underlying stock.
- If the stock rises rapidly, as Nvidia has, the fund’s NAV will increase over time, but will underperform the stock, often by a significant margin.
Income isn’t consistent
One important thing to know is that even if the ETF performs well, it isn’t likely to be a consistent income generator for you. In fact, since the fund’s May 2023 inception, monthly dividend payouts have been as low as $0.415 and as high as $2.6219. That’s more than a sixfold degree of difference. And there’s absolutely no way to know how much income you’ll get on a month-to-month basis.
What the charts are telling us
When it comes to covered call strategies, whether it’s an income ETF like this or if you’re simply writing covered calls in your own portfolio, a general rule is that when the underlying stock does really well, you’re going to underperform it.
That’s exactly what has happened with Nvidia. Over the past year, Nvidia stock is up by 166% as the surge in AI investment has been a massive tailwind to the business. On the other hand, even including its massive dividend yield, the YieldMax NVDA Option Income Strategy ETF is up by about 105%. That’s 61 percentage points of underperformance.
NVDY Total Return Price data by YCharts
Should you just buy Nvidia stock instead?
Before you decide to invest in the YieldMax NVDA Option Income Strategy ETF, there are a few things to consider.
First, don’t expect an 80% yield over the next 12 months. It could certainly happen, but a glance at the ETF’s dividend history shows that investors received disproportionately large payouts in months when the stock was soaring higher, which made options premiums high. YieldMax ETFs on stocks that have been less volatile are generally in the 30% range. Now, a higher yield could happen, but it probably would happen only if Nvidia either soared higher or dropped like a rock.
Second, the ETF share price itself is likely to go down over time. Nvidia’s price action over the past year, moving higher almost all the time, is an ideal scenario for a covered call ETF’s share price, and all it could manage was a 5% gain. To be sure, a flat-to-slightly down ETF share price combined with a dividend yield well into the double digits can still be a very nice total return, but keep the long-term declining nature in mind. As one suggestion, I’d probably skip automatic dividend reinvestment with this one as I’d want to limit my position in a stock that is destined to head lower over time.
As a final thought, YieldMax ETFs like this one work best in periods when a stock is moving higher over time, but gradually. If you think Nvidia’s period of rapid share price growth is behind it, and you have a high risk tolerance, a small position in the YieldMax NVDA Option Income Strategy ETF could make sense. But if you want to be a long-term investor in Nvidia stock, there’s simply no better way to do it than simply buying Nvidia stock.
Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
