When investors see an ETF promoting a sky-high yield, they might forget what they learned in Investing 101 By Jason Zweig Feb. 16, 2024 11:15 am ET 62 ILLUSTRATION: ALEX NABAUM ETFs that trade options on single stocks are promoting themselves with some of the highest yields I’ve seen in more than three decades of writing about investing. This week, San Francisco-based Kurv Investment Management highlighted yields of between 11.3% and 30.5% on its six exchange-traded funds; YieldMax, a family of roughly 20 ETFs, held out yields of 11.3% to 94.9%. What’s the problem? You might think these yields predict future returns. They don’t. And while the way these funds are reporting them is probably kosher, it is a perilously misleading illusion. You can’t extrapolate such high yields, and you can easily end up deep in the red if the market moves against you. NEWSLETTER SIGN-UP The Intelligent Investor Jason Zweig writes about investment strategy and how to think about money. These ETFs are a new wrinkle on what are known as “covered-call funds.” They offer jumbo current payouts using options contracts to wring extra yield from a single stock. If the underlying stock drops, these ETFs should go down somewhat less. That makes them appealing to tech-stock fans whose holdings pay paltry dividends or none at all and often suffer steep declines in price. Investors have flocked to some of these ETFs. The YieldMax fund that trades options related to Tesla stock was touting a yield of 56.6% this week and has attracted $820 million since its launch in November 2022. YieldMax’s option-income fund tied to Coinbase Global , reporting a 62.9% yield, has grown to $330 million since it opened last August. To get the percentages shown on their websites, these ETFs take the money they paid out in the latest month, multiply it by 12, then divide that by the fund’s net asset value. That’s called their distribution rate or distribution yield. Unfortunately, income generated by selling options swings wildly as the underlying stock fluctuates. The distribution yield is “what you got this month, but it might not be what you get next month or going forward,” says Howard Chan, founder of Kurv Investment Management, which runs the Kurv ETFs. At YieldMax’s TSLA option ETF, the payouts have varied between 44 cents and $1.07 per share in recent months. Nothing could be farther from fixed income—but giant distribution yields give no indication of that. SHARE YOUR THOUGHTS Have you made recent moves to extract more income from your portfolio? Join the conversation below. “You hope people understand that with more yield comes more risk,” says Jay Pestrichelli, chief executive of Zega Financial, which manages the YieldMax portfolios. “People should realize that something at a 70% yield should be riskier than something at 5%. That should be Investing 101.” Once people see a super-sized double-digit yield, however, they’re primed to flunk Investing 101. Alongside distribution yield, the ETFs’ websites also display a measure required by the Securities and Exchange Commission called SEC yield. This includes income from dividends and interest, but not from selling options. This week, SEC yields at nearly all these single-stock option-income ETFs were below 5%. That means these funds compensate you with a lower SEC yield than you could get in a low-risk government money-market fund even though, as their prospectuses openly warn, the ETFs could lose some—or all—of your money. But I doubt many investors even see the SEC yield once that massive distribution yield smacks them in the forehead. The return of this form of marketing bait harks back to the darkest days of the fund business. A 1986 advertisements from The Wall Street Journal. In the 1980s, mutual-fund companies used distribution yields to hawk “government-plus” or option-income bond portfolios. Slurping up roughly $50 billion from investors, these funds inflated income by selling call options on their bonds. The resulting double-digit payouts were unsustainable as interest rates went into free fall. The funds ended up cannibalizing themselves and crushing their investors. In response, the SEC imposed a rule in 1988 that required funds to stop using distribution yield unless it was accompanied by standardized measures of SEC yield and total return. The single-stock option-income ETFs appear to comply with that rule, since their websites display SEC yield equally prominently and also show total return. Back in 1988, the SEC noted concerns that “because investors naturally tend to focus on the larger number, the use of a distribution rate…[could] defeat the purpose of the uniformly calculated yield.” No one imagined back then that funds might someday promote distribution yields higher than 90%. So don’t focus on “the larger number.” The SEC yield and total return give a more realistic picture. Remember that the distribution yields on these funds are no protection against a loss in principal value. Measuring total return—both income and changes in price—the YieldMax TSLA fund is down nearly 8% since inception, even though Tesla stock gained more than 9% over the same stretch. “Nobody wants to disappoint investors because they don’t understand how a fund works,” says Zega Financial’s Pestrichelli. “These funds are not conservative alternatives.” Losses like the YieldMax TSLA fund’s can arise partly because a covered-call strategy doesn’t shine when the underlying asset makes big sudden moves up or down. And risk is intensified when a covered-call fund is tied to only a single stock rather than a basket or a market index. “You should know that when the underlying [stock] goes down, the fund will go down,” warns Chan, whose firms runs the Kurv ETFs. That’s because the income from options is only a partial buffer against loss. When you buy a fund for its yield alone, you’re likely to end up a lot wiser—but not wealthier. No one has ever said it better than the late market analyst Raymond DeVoe: “More money has been lost reaching for yield than at the point of a gun.” https://www.wsj.com/finance/investi...d-it-theres-a-catch-d11ab079?mod=hp_lead_pos7
Old time investor here. Tell me if I'm wrong, but this is a trust rather than an ETF?? Which means there may be limited times when you can withdraw part or all your funds... Again, looking back 50 years in my head...The bowels of the brain. Am I right??
The Yield Max products are in fact ETFs and you can exit any time. I've owned the 3 top yielders. They are crazy volatile and it seems the higher the price the higher the payout. Here are the last 3 month yields: TSLY 15% (TSLA) SQY 18% (SQ) CONY 26% (COIN) CONY's next dividend should be 8-10%.