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In this post, let’s take a look at the most popular YieldMax ETFs such as NVDY, TSLY, CONY and YMAX. YieldMax was making headlines with its high distribution yields that topped 100% or more. Let’s see if this is hype or a real thing. Towards the end, I will also try to conclude if these ETFs are suitable for retirement.

YieldMax ETFs are Not Cheap

First off, these funds are not cheap. They charge 0.99% in fees. YMAX has a 1.28% fee. Returns vary from year to year. But, fees are always subtracted regardless of performance. According to Morningstar, YieldMax one-stock ETFs are in the second-costliest quintile. The YMAX ETF is in the most expensive quintile.

Covered Call Funds Quick Primer

If you are reading this post, you are likely familiar with covered calls funds. So, I am not going into too much detail here. In a nutshell, they trade price upside for income by selling call options on an underlying asset. In other words, if Nvidia grows by almost 200%, NVDY’s total returns will be about 2x smaller. But, when Nvidia goes down, NVDY will go down too, but to a lesser extent. This is because sold option premiums shield NVDY from full extent of downside. In return, you get regular income distributions.

Like some other ETFs, YieldMax does not have a direct exposure to an underlying asset. Meaning, they don’t buy stocks of Nvidia, Tesla or Coinbase. Instead, they create a synthetic long exposure. They do so by buying call options and selling put options on Nvidia and other stocks. This allows them to gain the same exposure to stocks as if buying them directly. The benefit of synthetic exposure is higher leverage and lower capital commitment.

Also, YieldMax uses so-called FLEX options, which are customizable derivative contracts. The drawback of them is that they may have wider bid-ask spread and higher trading costs.

YieldMax ETFs Construction

When investing in TSLY, NVDY or similar single-issuer fund, an investor is making a bet on a single company. While Nvidia stock soared on the AI trend, I don’t think these parabolic returns are sustainable. If I invested in any of these one-stock funds, I would make sure to understand these companies well. How likely they will continue outperforming and so on.

It is less of urgency for YMAX. YMAX is a fund of funds. It invests in over 20 other YieldMax ETFs including TSLY and NVDY on an equal weight basis.

Each fund accounts for roughly 4% of YMAX assets. So, in a sense, YMAX is much more diversified compared to NVDY, TSLY and other one-stock ETFs.

YieldMax ETFs’ Distribution Yields

All YMAX funds boast massive distributions rates as of October 29, 2024. NVDY- 55%, TSLY – 110%, CONY – 101%, YMAX – 67%. But, these numbers are no more than the last distribution annualized. If we look at TSLY, for instance, we see a lot of fluctuations in distribution numbers.

For instance, the highest distribution per share in 2024 was $1.113 in January when TSLY price was $21.92. By doing a simple annualizing, we get the yield of 61%, not 110% we see today.

Conversely, we have the lowest 2024 distribution per share of $0.6448 in June when TSLY price was $14.83. Annualizing it, we get a yield of 52%. But, notice that by June, while your yield was still within the 50%-60% range, the price declined by a whopping 32%. So, in reality, if you bought TSLY back in January, your yield would not be 52%. It would be 35%.

Pretty much the same is true for all other YieldMax ETFs. Their distributions show large swings from period to period. The reason is stock price volatility. For instance, if we look at NVDY, we see that its highest distributions happened in March-April. If we check Nvidia stock price action, we see large price swings in those periods.

And, this is generally true for all covered call funds. Volatility is their friend. The reason has to do with stock option pricing. Every time volatility spikes, stock option prices spike too. And, the opposite is true. When the price goes sideways, the distribution yield for covered call funds can plummet by as much as 50%. Even YMAX ETF’s distributions fluctuate a lot as we see.

If we look at other funds, such as JEPQ, we also see fluctuations in distributions per share. But, the swings are not as large as for YieldMax ETFs. The reason has to do again with volatility. For instance, JEPQ loosely tracks Nasdaq-100 with less volatility in mind. JEPQ’s yield is roughly 12%, which is much lower compared to YieldMax funds. But, its distributions are more predictable. Also, JEPQ is less likely to show NAV erosion, which can be a big issue for YieldMax funds. I will talk about it in a second.

There is nothing wrong with distribution fluctuating. This is how YieldMax ETFs are supposed to behave by their design. If you are okay with that, that’s fine. But, if I were someone nearing my retirement, this would create a big headache for me. Simply put, YieldMax ETFs would make monthly budget planning an unpredictable nightmare.

YieldMax ETFs Performance

In the next section I use data and charts from Seeking Alpha. Seeking Alpha is a great tool to help you make better investment decisions as well as research ETFs and stocks.

The next thing to tackle is performance for YieldMax funds. Here is what we see on this chart showing total returns. Total returns take into account both distributions and price changes. Every time an underlying stock rallies, things are great. But, if the underlying plunges, things take a turn.

Tesla was the worst Magnificent 7 performer in the last year or so. If we look at the above total returns chart, here is what we see. When Tesla stock declined, TSLY declined by less. And, when Tesla recovered, TSLY recovered by less. This is as expected for covered call funds. Since its inception, TSLY is up by 3% compared to Tesla, which is up by 43%.

We also have a big winner, NVDY. Because of Nvidia’s rise on the AI trend, NVDY total returns have stood at almost 200% since its inception.

NVDY is by far the best performing YieldMax ETF, hands down. Again, comparing NVDY to Nvidia, we see underperformance. The fund traded price upside for regular income, as expected.

Should You Retire on 1-Stock YieldMax ETFs?

So, if I am a retiree or someone about to retire, here is a question to ask myself. Should I load on NVDY and call it a day? NVDY’s yield is massive. If I invested in NVDY at the beginning of this year, I would have gotten a distribution of $17.33. This has produced a yield of almost 80% on my stock price of $21.87. On top of that, the price appreciated by almost 15% by now.

Well, I don’t know you, but my goal in retirement is to have a stable and growing income, if such a thing exists. The problem with NVDY, TSLY, CONY or any other one-stock YieldMax ETF is that it is like stock picking. Their performance is unpredictable and varies from one ETF to another.

I don’t think it is a good idea to rely on stock picking to pay bills in retirement. These ETFs are undiversified and can crash. In this scenario, the distribution’s yields can evaporate quickly. If I still wanted to hold YieldMax 1-stock ETFs, I would make a small allocation to them. On top of that, I would diversify them with other holdings.

Can You Rely on YMAX ETF in Retirement?

YMAX fund is somewhat better in this regard. It bundles one-stock YieldMax ETFs into one product. Still, I see issues with it. First off, it is less diversified compared to similar funds. Even though its allocation to a single stock is no more than 4%-5%, it is still a lot.

We may counter this with the fact that other funds can also be top heavy. Take JEPQ, for instance. Each of its top 5 holdings has high allocations in the realm of 7%-8%. But, after that, weighting plummets below 2%-3%.

With YMAX, this is not the case. Allocations are equally weighted. This may expose the fund to a bad performance even from a few stocks.

But, there is one thing where JEPQ and similar funds differ from YMAX. Most of them follow some more or less diversified index. For instance,  Nasdaq-100 represents 100 largest stocks traded on Nasdaq. S&P 500 includes 500 largest firms. On top of that, S&P has other rules for profitability and liquidity. And, these indices weigh stocks based on their market cap. So, if a stock starts to underperform, its capitalization goes down and the index will drop it.  

Conversely, if a stock outperforms and its relative capitalization grows, its allocation increases. In other words, S&P 500 and Nasdaq-100 reward winners and punish losers. This partly explains why index ETFs are so popular. This is not the case with YMAX. It weighs everyone equally, regardless of whether it is a loser like TSLY or a winner like NVDY. In fact, YMAX actually rewards losers and punishes winners with its equal weighting.

Beware of Total Returns Numbers

Another issue with any high yield fund like those by YieldMax is this. Their total return numbers are meaningless if you don’t reinvest distributions. Returns on Yahoo Finance and other platforms are pretax with dividend reinvestment assumed. Many investors do not reinvest their dividends when it comes to high yield funds. Here is a quick comparison of total returns with and without distributions reinvested.

We see that the total returns difference for certain funds was staggering, especially for NVDY. What’s more, the higher the yield and price appreciation, the bigger the difference is going to be. As for YMAX, the difference is less pronounced. This is likely because the fund is new and not enough time has passed for the compounding effect to kick in.

So, this is something to keep in mind when comparing total returns across high yield funds. Not reinvesting distributions can skew results.

NAV Erosion for YieldMax ETFs Explained

Let’s tackle another important issue for covered call funds. And that is net asset value or NAV erosion. Net asset value of a fund is its equity. Equity is equal to all assets minus liabilities. NAV of a fund can change due to many factors including people putting or withdrawing money.

What is NAV Erosion?

But, when it comes to NAV per share, it can only change due to two things. These are net investment gains/losses and distributions. This is what we, as investors in ETFs, really care about at the end of the day. And, by the way, NAV per share is usually equal to the market stock price of a fund. NAV and price per share can diverge here and there. But, long-term, they should be about the same. So, NAV erosion is just a fancy way of saying that a fund’s market price goes down over time.

Of course, NAV erosion can happen when a fund sustains large investment losses. But, in case of covered call funds, this can happen when a fund distributes more than what it earned in a given period. For instance, in the case of TSLY, its price declined from $40/share to $12/share since inception. This is a clear sign of NAV erosion. This happened because of price declines of Tesla stock and continued distributions. The issue for TSLY was so severe that it even went through a reverse stock split of 1:2.

Funds like YieldMax are regulated investment companies (RICs). By law, they must distribute at least 90% of their income to investors. So, anytime they generate option premium income, they must distribute at least 90% of it to us.

TSLY’s Severe NAV Erosion

You can go and check YieldMax funds’ annual and half-annual reports to see it for yourself. Here is an income statement for TSLY.

In 2023, TSLY racked up a bunch of realized losses as Tesla stock dropped. At the same time, TSLY continued distributing premium income to shareholders. For this reason, the bulk of its distributions were a return of capital for tax purposes.

Return of capital distributions are not taxable. Instead, they reduce your cost basis in your investment. So, in a sense it is a tax-deferred gain. Once you sell your ETF shares, you will pay a capital tax gain with a new reduced cost basis. It seems like it has been less of an issue for other funds such as NVDY, CONY or YMAX.

NAV Erosion Leads to Declining Distribution Yields

So, why is this discussion on NAV erosion important? Because if we see large price declines with no sign of recovery, there are problems ahead. First off, your initial investment in the fund gets a haircut. If you sell it, you will get a much lower return on your initial investment. Second, when a fund’s price declines permanently, it will have to cut its distributions per share. There is no way around it.

TSLY is a prime example of this. We see large NAV erosion as the price went down by roughly 70%. This means that the fund at the end of day distributed more than it earned with mounting losses. As we saw earlier, TSLY distributions per share plummeted.

What’s worse, if you invested in TSLY at a price of $40 at its inception, your initial annualized yield was 60%. But, as of now it is roughly 33% as distributions per share got almost halved since then. Thus, when NAV erosion takes hold, a fund will have less capital to generate income and capital gains. The next thing is plummeting yields.

Of course, TSLY is the worst YieldMax fund to look at. Other funds, such as NVDY were great, at least for now. But, YMAX has seen some decrease in its price per share too from $20 to $17. It is not clear if this is a permanent or temporary decline. These funds can recover over time under favorable conditions. For this reason, it is best to assess NAV erosion by looking at longer periods, like several years.

Retirees Cannot Afford NAV Erosion

The goal in retirement is to have a growing and sustainable dividend income. You can’t have stagnating or worse, declining dividend income. Recent episode of high inflation rates underscored the importance of this.

What’s worse, if NAV erosion takes hold, you cannot keep all your distributions. You may have to reinvest at least part of them in either the same or a different fund. When NAV erosion happens, most of your distributions become a return of capital. It is like a fund is giving you your money back. If I gave them $10, they would start giving my money back one dollar at a time.  Unless a fund’s price recovers, my distribution yield would plummet.

How to Assess NAV Erosion?

To assess NAV erosion using a simple, back of the envelope method, start with a price chart. For instance, TSLY declined from $41 to $13 since inception. If you believe that this decline is permanent, you must reinvest at least $26 of your distributions. The ironic thing is that over the same period TSLY distributed $27. So you could have kept only $1.

Looking at YMAX, things are not as bad. Still, there is some price decline. The price dropped by 12% or $2.50 since inception. The total distribution per share for the same period was $6.43. This means that you should reinvest at least $2.50 (or roughly 40%) of your distributions to keep up with the NAV erosion.

This is an approximate and in no way precise way to figure this out. And, of course, this could be a temporary decline and YMAX may recover. For this reason, it is best to look at longer periods of time. But, we see that NAV erosion can be a real issue for YieldMax ETFs. Reinvesting distributions to counter price decline can lower income you get to keep.

YieldMax ETFs in Retirement Verdict

If I was someone in or nearing retirement, I would be hesitant to go heavy on one-stock YieldMax funds. They are like stock picking and are extremely risky. If you still want to invest in them, at least it is wise to keep your allocation small.

But, what if I am young, have a job and bullish on stocks, like Nvidia or Tesla? In that case, why not invest in them directly? That way, I don’t have to pay a 1% fee to YieldMax and could generate higher potential returns long-term. On top of that, I will pay less in taxes each year if I have to hold these stocks in a taxable account.

YMAX fund is of course better compared to TSLY or NVDY based on diversification criteria alone. Still, it is not as diversified compared to its peers such as JEPI or JEPQ. On top of that, you will still have to deal with swings in distributions per share. Also, you will need to keep an eye on NAV erosion due to too many distributions or losses from underlying stocks. My feeling is that any time a fund has a distribution yield above 20%, the risk of NAV erosion goes up by a lot.

Overall, if you understand well what you are getting into, I don’t think these funds are bad by themselves. Clearly, they have their own costs and benefits. The problem arises when investors jump into these ETFs with no understanding of their risks. YieldMax funds are not the set it and forget it type of dividend funds. You will have to constantly keep an eye on them, especially if you are thinking of retiring on them.