YMAX ETF: Striking A Balance Between High Yields And Risk Management

seekingalpha2024-07-01

JimVallee In February, I published an article on YieldMax NVDA Option Income Strategy ETF (NVDY) concluding that while the fund's performance was notable, the risks of single issued stock investments,...

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I thought a more risk managed way to own something like NVDY was to own YieldMax Magnificent 7 Fund of Option Income ETFs (YMAG) or the YieldMax Universe Fund of Option Income ETF (NYSEARCA:YMAX), which both contain NVDY. This article will cover YMAX. While the fund and it's underlying holdings have performed well, I believe more time is needed to test the fund's strategy against different market conditions. Fund Holdings & Strategy Incepted on January 15, 2024 and based in the U.S. with $256M AUM (assets under management), YMAX currently has a TTM yield of 16.38% and pays distributions monthly. The fund seeks income generation with a portion of the gains coming from call options strategies on the underlying holdings, in this case the suite of YieldMax ETFs, making the YMAX ETF a \"fund of funds\". YMAX Holdings (Seeking Alpha)Within the underlying holdings are primarily call options contracts and settled cash allocated to short-term treasury investments. The call options contract's strike price and date are made transparent to investors. The fund managers use two different covered call options strategies:  Traditional covered calls, where the fund sells a call option on an underlying security it owns. Synthetic covered call strategy, where the fund sells a call option on an underlying security it does not own. The fund will buy and sell the underlying holdings call and put options respectively at the same time to replicate the price movements of the underlying stock in spans of 6 months to 1 year.  Of note, the fund's TTM dividend yield of 16.38% is still growing and has not yet stabilized while the fund's yield on cost has remained relatively stable. Given the volatile nature of income investing options strategies, investors should not necessarily expect the funds yield to be stable as it will fluctuate along with the volitility of the underlying holdings. YMAX Yield (Seeking Alpha)YMAX YOC (Seeking Alpha)YMAX Performance Study Since the inception of YMAX, the fund has been keeping pace and at times even outpacing the the total return of the S&P 500, returning 14.58% vs. 15.96% respectively. Most of the returns of YMAX comes from the income distribution from the options strategy rather than the price return which has declined about 2% while the S&P 500 has run up over 15% YTD. From an income perspective, the fund is impressive thus far. While the returns of the market and YMAX are similar, a key difference are the majority of the returns of the S&P 500 are based on price return or \"paper gains\" while YMAX has are based on yield return. The fund has distributed a real cash return to shareholders which is an important characteristic when evaluating income generation of your investments. Of note, the beta of YMAX is about 1.75 vs. 1.00 for the S&P 500 benchmark, thus investors are taking on significantly more risk to get returns from YMAX. Data by YChartsSince YMAX is a \"fund of funds\" of the YieldMax family, I thought it would be interesting to plot each ETF's total returns based on the timeframe you could have owned one of them vs. YMAX. Several funds have returned more than 20% during this time, with YieldMax NVDA Option Income Strategy ETF (NVDY) and YieldMax MSTR Option Income Strategy ETF (MSTY) returning a staggering 82.6% and 79.8% respectively in the last ~6 months! Also, it's encouraging to see most funds generated a positive return and the four that did not had losses less than 15%, not something like 30, 40, or 50%. For YMAX, each holding carries around a 5% weight in the fund. YMAX Holdings Total Return Since YMAX Inception (Seeking Alpha, Nicholas Bratto)I thought it would also be interesting to plot each YMAX holding since their own inception dates to get a better idea of how something like YMAX could play out long-term. The data shows a similar trend, with more time lending to increased returns on the funds holding's total returns. However, one data point, and it only takes one, exemplifies why dazzling 20%+ returns should be cautioned when we see things like YieldMax AI Option Income Strategy ETF (AIYY) returning -22.7%. YMAX Holdings Total Return Since Their Inception (Seeking Alpha, Nicholas Bratto)If an investor is trying to assess each ETF's underlying price movements and hand pick them, even if 3 of them return 10%+, it only takes one -20%+ loss to wipe out all the gains. Or worse, just picking one ETF hoping to achieve an 80% return only to lose 20% of your money! The case for YMAX is really about seeing if the yield and the NAV are sustainable by holding the entire portfolio of their strategy to reduce the risk of NAV erosion. Based on the performance thus far, I would say it's doing a good job at that. Outlook  Though I like how YMAX and it's underlying holdings have performed, I still rate this ETF as a \"Hold\" as I don't feel the strategy has had enough exposure to father time. The underlying holdings have only been exposed to the market's bull run since mid-2023. Seeing how the fund performs in market downturns or flat markets would give me more confidence in the sustainability of the total returns. Ultimately, I'm looking for this fund to return 8%+ sustainably for it to be considered an add to my portfolio or recommend it as a Buy. The fund carries a lot more risk and volatility in than funds targeting a 1% payout like Neos S&P 500(R) High Income ETF (SPYI) or NEOS NASDAQ-100(R) High Income ETF (QQQI), both of which I've also written on. For investors that already own or want to buy this fund, I recommend you reinvest a portion of the dividend. For example, pay yourself an 8% yield and reinvest the rest. This will prevent NAV erosion and grow your income stream long-term.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2448997190"}