APLY: Printing Income From Apple Exposure Comes At A Cost

seekingalpha11-22 22:28

YieldMax AAPL Option Income Strategy ETF offers high dividend yields, but suffers from NAV erosion and underperformance compared to peers.APLY's synthetic covered call strategy limits upside potential...

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}\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\">\nAPLY: Printing Income From Apple Exposure Comes At A Cost\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-22 22:28 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739607-aply-printing-income-from-apple-exposure-comes-at-a-cost><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>YieldMax AAPL Option Income Strategy ETF offers high dividend yields, but suffers from NAV erosion and underperformance compared to peers.APLY's synthetic covered call strategy limits upside potential...</p>\n\n<a href=\"https://seekingalpha.com/article/4739607-aply-printing-income-from-apple-exposure-comes-at-a-cost\">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":"APLY","symbol_name":"YIELDMAX AAPL OPTION INCOME STRATEGY ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4739607-aply-printing-income-from-apple-exposure-comes-at-a-cost","article_id":"2485160269","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/173024781/image_173024781.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485160269","pubTimestamp":1732285736,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"YieldMax AAPL Option Income Strategy ETF offers high dividend yields, but suffers from NAV erosion and underperformance compared to peers.APLY's synthetic covered call strategy limits upside potential","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"APLY":"YIELDMAX AAPL OPTION INCOME STRATEGY ETF"},"translate_title":"APLY：苹果曝光的印刷收入是有代价的","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"APLY":0.9},"content_text":"YieldMax AAPL Option Income Strategy ETF offers high dividend yields, but suffers from NAV erosion and underperformance compared to peers.APLY's synthetic covered call strategy limits upside potential, making it less suitable for capital appreciation and more for income in a sideways market.The fund struggles to generate enough earnings to support distributions, leading to NAV decay and increased risk due to single stock exposure.APLY may be useful for income-focused investors but has significant drawbacks, including inconsistent dividends and poor long-term performance.Portions of the dividend are funded by the return of capital, which may increase the tax-friendly nature of the income received.   jcguardia/E+ via Getty Images  Overview YieldMax AAPL Option Income Strategy ETF (NYSEARCA:APLY) operates as an income focused ETF that aims to mirror the daily price movements of Apple (AAPL) through its synthetic exposure. Apple's price has run up considerably and now sits near all-time highs, which means it can be scary for newer investors to initiate a position at these highs. Additionally, there are estimates that forecast the S&P 500 only averaging 3% annually over the next decade, driven by slower earnings growth throughout the technology sector. If this outlook comes true, you may believe that APLY may be a great way to hedge your bets and collect income from a sideways moving market. However, APLY has underperformed some peers while showing questionable dividend coverage. The main appeal of APLY is that it currently provides investors with a huge dividend yield of about 24.5%. However, this kind of high dividend yield does come with its own set of drawbacks. For instance, the price has retracted by nearly 12% since the fund's inception back in early 2023. While the high dividend yield helps boost the total returns up above 25%, capital erosion can be an issue over time. While I have recommended some other high-yielding funds like this in the past, APLY is a bit different because of the poor financial performance within the most recent reporting. Data by YCharts The fund's primary objective is to seek current income, so APLY should not be utilized if you seek the highest possible total return of capital appreciation. Net assets of the fund are quite small still at only $100M, but APLY operates with a very reasonable gross expense ratio of 0.99%. While the fund aims to mirror the price movements of Apple, APLY doesn't actually hold any of the underlying equity within. A quick comparison shows us the price disconnect between AAPL and APLY. Just on a YTD basis, we can see that AAPL has moved up by nearly 19%, while APLY has deteriorated by 11%. So, let's first dig into the fund's strategy and why it may continue to underperform. Data by YCharts Fund Strategy APLY is actively managed by Tidal Investments and has the primary objective of providing a high current income from the option strategy that it implements. The synthetic covered call strategy allows APLY to benefit from indirect exposure to the share price of AAPL. However, this exposure has a capped upside, so APLY will always underperform AAPL from a price prospective. As we saw from the previous performance comparison, the price growth between AAPL and APLY will only widen as AAPL continues to rise in value. This is because of the ATM (at-the-money) options that are implemented, which don't allow for much upside appreciation since growth is limited to the closely set strike price. The most ideal scenario for APLY would be for the underlying share price of AAPL to remain steady and trading sideways. This would allow APLY's price to stabilize and the total return potential to increase as the premium collected from options continue to roll in. If the average return over the next decade really does only amount to 3% annually, this would provide APLY the opportunity to outperform. Outperformance is possible because part of APLY's strategy is to implement OTM (out-of-the-money) options. Unlike ATM option, a OTM strategy allows for a greater amount of upside to be realized by setting the strike price up to 15% above the current market price of AAPL. Let's imagine that AAPL trades at a price of $230 per share and APLY utilizes an OTM strategy and sets a strike price of $240 per share. If AAPL has a strong quarter and appreciates up to $250 per share, APLY would still capture the price gains up to the $240 strike price, but anything above that would be sacrificed. No only would APLY see some upside, but the premiums collected would help boost total returns. The prospectus has a near breakdown of the different strategies used.   APLY Prospectus Risk Profile Despite part of the option strategy allowing for some upside to be experienced, a major drawback of these funds are the shrinking NAVs. Measuring the net asset value of a fund is a great way to gauge how healthy the fund's internal performance may be. In general, a shrinking NAV is an indication that the fund does not generate enough earnings to fully support the high distribution. This is a common problem when it comes to the YieldMax funds, as we can see below. Almost all of the funds that are tied to single stock exposures are down in price, with Yieldmax AMD Option Income Strategy (AMDY) leading the charge with a decline of over 50% in less than 1 year. Data by YCharts These concerns are only proven when looking at the financial reporting for APLY. The latest reporting is the semi-annual report which dates back to the month end of April. However, this still confirms that APLY is currently on the way to following the same path as the other YieldMax funds. Net investment income only amounted to $0.37, while net realized gains landed at $0.09 per share. However, the total semi-annual distribution amounted to $2.17 per share. Since the fund didn't actually generate enough earnings to cover the distributions, APLY has to make up the different by pulling distribution from the total NAV. As we can see, the NAV started out at $18.33 per share, but then deteriorated down to $16.62 per share by the time of this reporting.   APLY Semi-Annual Report If you care about capital preservation, I would avoid this fund because the current path it's on indicates more price deterioration to come. Therefore, APLY is not the best fund to be in during a strong bull market or when AAPL is rapidly growing. Additionally, single stock risk is my primary concern with APLY because it leaves it a lot more vulnerable to price volatility than other index-based income ETFs. Unlike some peers that are tied to an index, APLY only aims to mirror the price movements of one individual stock, further increasing the risk. Lastly, I wanted to also demonstrate that there are some YieldMax funds that do over their distribution rate in a healthy fashion. In this example, we can see that YieldMax AMZN Option Income Strategy ETF (AMZY) does, in fact, generate enough earnings through a combination of net investment income and net realized gains. When the fund covers the distribution fully, it will not suffer from the same NAV decay problem.   AMZY Semi Annual Report Performance Comparison With so many of these option income funds launching, it's important to run quick comparisons against one another to see which funds have the best total return. Unfortunately, I've discovered that a lot of these higher yields are a bit of a gimmick at times due to the NAV erosion that is so common. You need to ask yourself, what's the point of collecting a 24% dividend yield if the asset falls in value by 20% per year? A way that some options funds have offset NAV erosion is by linking their underlying strategy to an entire index. For instance, Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and NEOS S&P 500 High Income ETF (SPYI) are two different examples of option-based funds that tie their underlying holdings to the S&P 500. Unlike APLY, these two peers actually hold weight in the equities that they aim to mirror, which already makes these peers a lot more attractive for a long-term holding. The downside to these alternatives is that the dividend yields aren't as juicy, with GPIX offering an 8% yield and SPYI offering an 11.7% yield. However, these lower yields help these peers do a lot better from a price perspective. We can see that APLY has fallen by a little over 2% over the last year, while GPIX grew by over 27% and SPYI grew by about 14% over the same time period. However, the higher dividend yield is only one aspect causing the underperformance. These funds simply operate in a much more efficient manner that allows for a higher upside to be captured. For instance, I recently wrote an analysis about GPIX and how the option strategy is dynamic, meaning that the fund can reduce the amount of options deployed during bull markets so that it can capture a higher rate of capital appreciation. Data by YCharts Even when we compare APLY against a higher yielding option income ETF such as REX FANG & Innovation Equity Premium Income ETF (FEPI), we can see that the single stock exposure underperforms and typically has a higher level of volatility associated. Similar to APLY, FEPI sports a higher dividend yield of about 26%. Unlike APLY, FEPI actually holds a diverse range of underlying equities, which helps provide better price stability and eliminate that single stock exposure. It comes as no surprise that FEPI has provided a higher total return compared to APLY, while also preserving capital over the last year. With a handful of alternatives in mind, it becomes a bit difficult to recommend APLY. Data by YCharts Flawed Dividend APLY recently declared a monthly dividend amount of $0.3348 per share. If you held 1000 shares, equivalent to approximately $17,500, this would be generating you a dividend of about $335. If this monthly rate were to remain around the same range over the course of 12 months, it's technically possible to collect an annual dividend total of over $4,000. However, a steady rate of distributions has not been the reality for APLY investors. This is because the distributions are determined by the fund's performance during the given month and can wildly vary based on how effective the options were at collecting premiums. Therefore, APLY may not be the best choice for you if you seek a consistent and predictable stream of monthly income.   Seeking Alpha Additionally, investors should be made aware that the dividends have been primarily funded by net investment income, according to the latest Section 19a Notice. Approximately 62% of the distributions have come from underlying net investment income as a result of the option strategy, whereas the remaining 38% consists of return of capital. Since the majority of the distributions are coming from the fund's earnings, the rate of NAV decay will not happen as rapidly as a fund that is paying out the majority of their distributions as return of capital. The downside of this is that the majority of income collected from APLY will be classified as ordinary dividends, which have unfavorable tax consequences. This can be offset by utilizing APLY within a tax advantaged account.   APLY Section 19a Notice While return of capital distributions are much more tax friendly, this form of distribution gets pulled directly from the NAV. Therefore, it can add damage to price falls during bearish market movements. I would only suggest a position in APLY if you believe that markets will trade sideways for a bit. This would allow some time for the NAV to recover a bit and increase the health of the fund. If you find yourself in a scenario of needing income without necessarily caring about the capital preservation aspect, APLY could be a fitting choice. If the price were to stabilize, income investors could use an ETF like APLY to either build a cash position or allocate the dividends into other areas of the portfolio. Since the distributions are paid on a monthly basis, you could implement a dividend wheel strategy and use the distributions to help you accumulate shares in another area of your portfolio that could be presenting a more attractive value proposition. Takeaway In conclusion, I rate APLY as a hold at the moment due to the fact that the high distribution yield can definitely be utilized to help grow your portfolio. Distributions can be funneled into other areas of your portfolio that offer better value, or the price of AAPL can stabilize and provide an opportunity for APLY's NAV to improve over time. In addition, the fact that portions of the dividend are funded by return of capital makes it a bit more tax friendly and versatile to be utilized in different accounts.  However, there are just too many different aspects for me to be cautious about with this specific YieldMax fund. For instance, the fund is struggling to generate enough earnings to fully support the distributions, which means that NAV decay is likely to continue. Unlike some peers mentioned here, the fact that APLY holds single stock risk and underperforms peers makes it a lot less attractive to hold over the long term. Conditions and performance can improve, but it depends on the underlying movements of AAPL. Therefore, I plan to just stay on the sidelines and observe for now.","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":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"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/2485160269"}