ULTY: 2 Ways To Utilize The Massive Distribution

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YieldMax Ultra Option Income Strategy ETF offers a high annual distribution rate of 83% by implementing covered call strategies.ULTY is an actively managed fund with changing holdings based on implied...

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D-Keine/E+ via Getty Images Overview I think that one of the biggest mistakes that dividend and income focused investors make is the automatic dismissal of high yielding funds we don't understand. I see it all of the time when it comes to high yielding assets like Closed End Funds, Business Development Companies, and REITs. I see the same pattern happening when it comes to these new YieldMax Income ETFs. 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D-Keine/E+ via Getty Images Overview I think that one of the biggest mistakes that dividend and income focused investors make is the automatic dismissal of high yielding funds we don't understand. I see it all of the time when it comes to high yielding assets like Closed End Funds, Business Development Companies, and REITs. I see the same pattern happening when it comes to these new YieldMax Income ETFs. While I do fully understand the hesitation on embracing these sorts of funds, I do believe they have their use cases. These new option focused funds that are specifically focused on generating extremely high levels of income and people love income! I want to focus exclusively on the YieldMax Ultra Option Income Strategy ETF (NYSEARCA:ULTY). According to the YieldMax site, UTLY rocks an annual distribution rate of a whopping 83%. However, the real distribution may actually be larger than this, which I will cover shortly. Yes, that is a real yield and the distributions have remained intact since the fund's recently inception of February of 2024. The fund is advised by ZEGA FINANCIAL LLC and has a management fee of 1.24% but decided to implement a fee waiver of 0.10% through February of 2025, bringing the total annual fund operating expenses to 1.14%. I have to admit that I was also a bit offput by the rapidly deteriorating price since inception. Despite the fund being new, the price and NAV has fallen by over 33%. However, the high distribution rate has offset this and brings the total returns to 1.5%. Keep in mind, the fund is new and there has only been a total of five monthly distributions. Data by YCharts Since the distributions are so large, the price declines are almost inevitable over a long period of time. While I want to explicitly make it clear that ULTY is not a simple buy and hold income ETF that you can forget about. It can be a hold if you have a specific strategy in mind and you would be likely doing yourself a disservice if you did not actively manage the distributions received from ULTY. I will share two separate strategies here that could be efficient ways to utilize a high yielding fund like ULTY. Be aware that both of these strategies aren't necessarily recommendations and due to the elevated risk of an option fund like ULTY, I would keep my total exposure as a small percent of my portfolio. Fund Strategy & Distributions ULTY is an actively managed fund that has an object of seeking monthly income from a portfolio of different holdings that covered call strategies are implemented against. While part of the strategy is to provide direct exposure to the share price of the underlying assets, this is unlikely to pan out in reality over the long term. This is because the use of covered call strategies like this cap the upside potential while still giving shareholders exposure to all of the downside potential. This concept is directly stated in the fund's overview. Due to ULTY’s investment strategy, ULTY’s indirect exposure to gains, if any, of the share price returns of the Underlying Securities is capped. However, ULTY is subject to all potential losses if the shares of the Underlying Securities decrease in value, which may not be offset by income received by ULTY. The fund's top holdings can change at any time due to the selection process. ULTY picks its holdings based on implied volatility levels based around different catalysts. This can include the use of earnings season, where volatility is normally higher than usual. This is because the higher volatility can be used as a way to generate higher income from the option premiums. As a result, the distribution rate changes on a month-to-month basis as a reflection of the fund's performance and volatility level. The everchanging holdings is what separates ULTY from its popular single stock peers like YieldMax COIN Option Income Strategy ETF (CONY) or YieldMax TSLA Option Income Strategy ETF (TSLY) that only hold exposure to one single underlying asset. The most recently declared monthly distribution is $0.9948 per share, which has been the lowest confirmed distribution since the fund's inception. The annual distribution is calculated by taking the most recent declared distribution and assuming that it remained the same for the remainder of the year. If we take the most recent declared distribution and multiplied it by the remaining 5 months of the year, we'd get $4.974 per share. If we take this amount and add it to the distributions that were already paid, totaling $5.89 per share, we get a total estimated annual distribution of $10.864 per share. This would make the actual estimated yield somewhere around 84.2%. It's important to know that the price of ULTY will drop by the amount of the distribution every month. As a result, some reinvestment of the distribution may help improve the yield and offset some NAV erosion over time. This distribution yield is earned through its portfolio of holdings. We can see that that Advanced Micro Devices (AMD) makes up the largest weight of the fund at 3.75%. Naturally, the top holdings lean more heavily on companies within the tech sector as these are typically more volatile and sensitive to catalysts such as earnings reports, interest rates, and momentum. However, the holdings here can be swapped out and changed on a daily basis depending on the implied volatility.   YieldMax To help visual how the fund works, let's imagine that all of the holdings within ULTY remained flat for an entire month for whatever reason. Well, as the fund generates the covered call premium, the price of ULTY will actually move up by the premium that the covered calls are sold. However, if the prices moved down, we'd see ULTY capture the full effect of the downside. Additionally, ULTY's prospectus has a helpful table that helps explain the option strategies that can be utilized. Call options and put options both implement 'at the money' call options. This means that the upside price is capped during bull markets, but the full share price loss may be experienced during bear markets. The expected target maturity is typically between one to six months. Additionally, there are short call options that are set at a strike price that is between 0% to 15% more than then current share price of the underlying securities.   ULTY Prospectus  ULTY Prospectus There is also some exposure here to the crypto markets, and this can be accompanied by small-cap companies that have large price swings frequently. Therefore, I want to emphasize that the upside here is limited due to the covered call nature, whereas the downside is not. You can suffer extreme principal erosion if you hold without having an active strategy in mind or do not reinvest any portion of the distribution. However, I wanted to be fair and also provide two different use cases that I can see as viable strategies to help accelerate the income your portfolio generates. Strategy #1 - Dividend Wheel The first use case would be to implement a dividend wheel approach. This simply means that you initiate a small position into ULTY to gain exposure to these high distributions. You would then take the distributions received from ULTY and funnel them into other areas of your portfolio that may be underweight, on sale, or offer a more traditional sense of dividend growth performance. For example, I personally have a very small allocation to some YieldMax funds that account for only 2% of my portfolio. I collect the monthly distributions from these positions and funnel them into Schwab's U.S. Dividend Equity ETF (SCHD). SCHD offers a double-digit dividend growth rate while maintaining a diverse exposure across many different sectors. By all means, it is as traditional of a dividend ETF that you can get. The distributions received from SCHD are mostly classified as qualified dividends, which makes it more tax friendly. The goal for me here is to maintain exposure to a YieldMax fund such as ULTY for long enough until I recover my initial investment back through distributions. For example, if I originally invested $5,000, I would ideally want to stick around until I collect that original $5,000 back as distributions. At that point, I would have received my initial investment back and would now be playing with 'house money' in a way. I would then have a source of income that can be repurposed to SCHD or any other area of my portfolio that presents the most value. The obvious downside to this method is that the fund has to remain intact long enough for me to get my initial principal back in the first place. If the price drops more rapidly than the distributions can make up for, I would only be impeding on my progress of growing my dividend portfolio at a faster rate. As a result, timing the initial buy in is important and reducing your cost basis may be needed to help cater to this strategy. Strategy #2 - Supplement Retirement The second way that I would utilize a fund like this is by blending in some very light exposure to a diversified mix of holdings. For instance, may you are nearing retiring and want to supplement some of your portfolio income with ULTY. This would allow you to instantly create a larger source of distribution income to pull that would essentially allow you to allow some other core holdings remain untouched. This would allow the ability for some of the longer established holdings to remain left alone and their dividends could continue to be compounded without interference. If you are at this part of your life, there's an increased likelihood that you would be okay with this kind of trade off; potentially sacrifice some capital with an investment in ULTY or any other YieldMax fund and allow your long-term core positions to continue compounding at their max capacity with full dividends being reinvested. If you are nearing the retirement age, you'd also be able to benefit from collecting these high distributions within a tax advantaged account. This would help minimize the total tax burden received here, making these funds massively more appealing. The larger cash distributions received from ULTY could also allow the flexibility to build a small cash reserve as well. Lastly, the fact that these distributions are issued on a monthly basis makes it very possible for these high yields to produce enough of a cash flow to pay some bills. Outlook & Risks We are currently seeing a shift away from tech focused holdings, which may affect the share price of ULTY as the underlying holdings are subject to decreases. Capital seems to be shifting away from these high multiple companies and flowing into smaller caps because of anticipation of interest rate cuts. Interest rate cuts may create a more favorable environment for small caps that depend on cheap debt to fuel operational growth and different expansion efforts. Rate cuts are beginning to look more realistic for the end of the year when you consider that inflation has consistently decreased down over the last several months. We will also have to await to see which direction the market will be going during the US Presidential elections happening later this year. This can introduce higher levels of uncertainty and volatility in the market. While ULTY may benefit from the higher volatility due to the premiums the fund can collect, the underlying assets will likely be vulnerable to downside price movements as a result of this. Therefore, caution is advised here as we have no indication or prior dataset to reference on how ULTY may react to these changing environments. Additionally, it's very important to know that the distribution received from ULTY are classified as ordinary dividends. As a result, these suffer the most unfavorable tax consequences when compared to the qualified dividends that you'd get from more traditional ETFs or dividend growth stocks. Therefore, holding ULTY in a taxable account would be less idea and since the distribution here is massive, the tax burden you are left with at the end of the year can catch you off guard. This can potentially be offset by holding a high yielding position like this in a tax advantaged account so that the tax burden is softened. I would consult with a tax professional first to see what best matches your situation. Takeaway  In conclusion, funds like ULTY present elevated risk levels, but they can have specific use cases. If you are looking for growth, a covered call option ETF such as ULTY is not for you. One of the clear risks of a fund like ULTY is the consistent erosion of NAV over time. While this can be offset with underlying asset growth, we cannot control this. As a result, some reinvestment may help offset the erosion as it ultimately helps grow the distribution received while also mitigating the impact of the falling price. A covered call option ETF like ULTY essentially caps the upside price movement while still exposing investors to the full downside risk. However, this may be useful for investors that can implement one of the two strategies mentioned here.","kind":null,"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":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"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":"4.29.2","shortVersion":"4.29.2","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/2452823106"}