MSTY: Look Beyond The Yield

seekingalpha08-08

Olemedia To be honest, I do not have a positive opinion of single-stock covered call ETFs like the Yieldmax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). To satisfy investors' insatiable appetite ...

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To satisfy investors' insatiable appetite ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711625-msty-look-beyond-the-yield\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>MSTY: Look Beyond The Yield</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMSTY: Look Beyond The Yield\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-08 02:16 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4711625-msty-look-beyond-the-yield><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Olemedia To be honest, I do not have a positive opinion of single-stock covered call ETFs like the Yieldmax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). To satisfy investors' insatiable appetite ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711625-msty-look-beyond-the-yield\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4711625-msty-look-beyond-the-yield","article_id":"2457875493","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1368998806/image_1368998806.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2457875493","pubTimestamp":1723054596,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Olemedia To be honest, I do not have a positive opinion of single-stock covered call ETFs like the Yieldmax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). To satisfy investors' insatiable appetite f","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4588":"碎股","JEPI.AU":"JPMORGAN EQ PREM INCOME ACTIVE ETF","BK4550":"红杉资本持仓","BK4178":"家庭装饰零售","MSTY":"YIELDMAX MSTR OPTION INCOME STRATEGY ETF","BK4585":"ETF&股票定投概念","FDN":"First Trust Dow Jones Internet I","BK4023":"应用软件","BK4595":"比特币概念","JEPI":"JPMorgan Equity Premium Income ETF","MSTR":"MicroStrategy"},"translate_title":"MSTY：超越收益率","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"MSTR":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"MSTY":1,"JEPI.AU":1,"JEPI":1,"US7Y.BOND":1,"FDN":0.9,"US912797HE00.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6},"content_text":"Olemedia To be honest, I do not have a positive opinion of single-stock covered call ETFs like the Yieldmax MSTR Option Income Strategy ETF (NYSEARCA:MSTY). To satisfy investors' insatiable appetite for high-yielding investments, fund innovators like Yieldmax keep pushing the envelope by wrapping highly volatile securities like MicroStrategy Inc. (MSTR) shares into derivative structures and calling them ETFs. Unlike traditional covered-call funds like the JPMorgan Equity Premium Income ETF (JEPI), single-stock ETFs have significantly different risk profiles compared to JEPI's diversified portfolio of stocks, and their behavior may not be well understood by retail investors. In my opinion, MSTY's incredibly high distribution yield is simply a reflection of the volatility of the underlying MSTR shares and there is no systematic 'alpha' from selling call options. One important downside of the MSTY ETF that is not discussed is the potential tax liabilities from investing in the MSTY ETF vs. buying MSTR shares. Investors in MSTR shares have control over when they realize capital gains taxes. However, investors in the MSTY ETF do not have this control, as the ETF's high distribution yield is partly funded from net investment income, which is a current tax liability. Overall, to buy the MSTY ETF, investors need to have a bullish view of MSTR shares. In my opinion, MSTR shares are grossly overvalued, trading at more than 2x the value of the bitcoins held in treasury. I would personally avoid the MSTY ETF. Fund Overview The Yieldmax MSTR Option Income Strategy ETF is an actively managed ETF that seeks to generate monthly income by writing call options on MicroStrategy stock to harvest the stock's elevated option premium yield. The MSTY ETF has been hoovering up assets since its launch in February, gathering over $400 million in AUM in a few short months (Figure 1). Like its sibling funds, the MSTY ETF charges a 0.99% expense ratio. Figure 1 - MSTY overview (yieldmaxetfs.com) The MSTY ETF and its family of sibling funds achieve their objective by creating \"synthetic covered calls\" on the underlying securities. Synthetic long exposure to MSTY is obtained by selling puts on the underlying stock while simultaneously buying calls (Figure 2).   Figure 2 - Illustrative synthetic long exposure (optionsplaybook.com) Looking at MSTY's portfolio, we can see that the fund currently holds a synthetic long position using August 2024 monthly options with a 1550 strike (Figure 3). The ETF also sells weekly options to earn premium income. Figure 3 - MSTY portfolio holdings (yieldmaxetfs.com) The MSTY ETF also holds excess cash in treasuries and money market funds to earn additional yield. Distribution & Yield The main purpose of a covered-call strategy is to convert option premiums into distributions for investors. On this front, the MSTY ETF has done a fantastic job, paying over $12 / share in distribution since the fund's inception in February. The MSTY ETF is currently yielding an annualized 105.3%, based on the latest monthly distribution (Figure 4). Figure 4 - MSTY has an annualized 105% distribution yield (yieldmaxetfs.com) MSTY is able to pay such high distribution yields because MSTR stock trades with a 94% implied volatility, among the highest in the equity markets (Figure 5). Figure 5 - MSTR has a 94% implied volatility (barcharts.com) However, as I have explained in prior articles, MSTR's high implied volatility does not necessarily make the stock a good candidate to sell call options on. Implied Volatility is simply a measure of the market's expectation of future price fluctuations on the stock, so MSTR's high IV could be a reflection of the stock's volatile nature. In fact, if we look at MSTR's historical realized volatility compared to its implied volatility, the two series closely track each other, with only brief periods of divergence, so MSTR options are usually not mispriced (Figure 6). Figure 6 - MSTR implied vol and realized vol track each other (unusualwhales.com) Trading Upside For Premium Income The main drawback of MSTY's covered call strategy is that it trades upside for premium income. If the underlying stock rallies significantly in a short period of time, the fund does not participate in the stock's upside beyond the strike price of the call options sold. For example, since inception, the MSTY ETF has returned 82.5% compared to 103.0% for MicroStrategy shares (Figure 7). This has coincided with the large rally in bitcoin earlier in the year, which boosted MSTR shares. Figure 7 - MSTY has underperformed MSTR since inception (Seeking Alpha) On the other hand, while upside returns are capped, downside returns are uncapped. So if MSTR shares start heading lower, the MSTY ETF may still suffer significant capital losses. For example, in the past week, MSTR shares have lost 17.9% while the MSTY shares have lost 11.8% (Figure 8). Figure 8 - MSTY experiences downside comparable to MSTR (Seeking Alpha) At the end of the day, investors considering the MSTY ETF should base their investment decision on the underlying security. Are they bullish on the fundamental prospects of MicroStrategy shares? If the answer is 'yes', then they should ask whether they are willing to trade away a portion of their upside returns in exchange for a high distribution yield. Beware Tax Liabilities Another potential downside to the MSTY ETF is the tax liabilities from MSTY's high distribution yield. When an investor buys MSTR stock, they are liable to pay capital gains taxes if the stock appreciates, but this is only payable if/when the investor sells their shares. However, with the MSTY ETF, approximately 60% of the fund's distribution is considered net investment income (\"NII\") and is subject to regular income taxes (Figure 9). Figure 9 - Approximately 60% of MSTY's distribution is considered NII (yieldmaxetfs.com) This means that compared to owning MSTR shares, investors in the MSTY ETF may have current income tax liabilities, even if they do not 'sell' their investment. When Might MSTY Be Better Than MSTR? In my opinion, there are only a few scenarios when owning the MSTY is better than owning MSTR shares. Specifically, if investors believe MSTR shares will trade in a 'sideways' range, but investor interest remains high (keeping implied volatility elevated), then MSTY may be able to benefit from a wide implied volatility-to-realized volatility gap and outperform. We saw brief stretches of this behavior in March (Figure 10, March 5th to April 22nd) and May (Figure 11, May 15 to June 18) when the MSTY outperformed MSTR. However, this behavior typically does not last long, as market makers are quick to adjust their option prices. Figure 10 - MSTY outperformed MSTR briefly when implied vol was higher than realized vol, March 5 to April 22, 2024 (Seeking Alpha)Figure 11 - MSTY outperformed MSTR briefly when implied vol was higher than realized vol, May 15 to June 18, 2024 (Seeking Alpha) Conclusion The Yieldmax MSTR Option Income Strategy ETF provides investors with high current income from writing short-term covered calls on MicroStrategy stock. The MSTY ETF is currently paying an incredible 105% annualized distribution yield, making the 'fund' appear very attractive for income-oriented investors. However, there are downsides to the MSTY ETF that investors should understand before investing. First, MSTY's high distribution yield is derived from the extremely high implied volatility of the underlying MSTR stock. Except for brief stretches of outperformance when implied volatility is higher than realized volatility, there is usually no 'edge' from systematically selling call options since market makers are adept at pricing options. Furthermore, the covered-call strategy may be converting unrealized capital gains into taxable income, as a significant portion of the ETF's distribution is considered net investment income. Overall, a bet on MSTY is really a bet on MSTR. If MicroStrategy shares decline, MSTY will most likely deliver negative returns. Since I believe MSTR's shares are vastly overvalued relative to the value of bitcoins held in the company's treasury, I recommend investors avoid the MSTY ETF (Figure 12).  Figure 12 - MSTR is currently trading at over 2x the value of the bitcoins held in treasury (mstr-tracker.com)","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","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/2457875493"}