In the world of exchange-traded funds (ETFs), ultra-high-yield single stock covered call ETFs have become all the rage. These funds leverage the volatility of their underlying stock to generate enormous yields from option income.
Take the case of Strategy (MSTR +10.31%). This Bitcoin-linked stock is down roughly 67% from its all-time high, as the crypto itself is about 40% below its peak. One might think that using a fund such as the YieldMax MSTR Option Income Strategy ETF (MSTY +8.00%), which currently has a 75% yield, could be a good way to offset some of those share price losses.
Understanding whether a fund like this is a smart choice requires a deeper understanding of how they work. In a lot of cases, the yield isn’t worth the risk.
Image source: Getty Images.
Key takeaways
- MSTY generates income by selling call options on Strategy. Its yield is correlated to Strategy’s implied volatility.
- Over the past year, on a total-return basis, MSTY has lost 47%, compared to a 54% loss for Strategy.
- Since MSTY’s launch in early 2024, its performance has meaningfully lagged Strategy’s. Its high yield hasn’t translated into higher total returns, despite the stock experiencing both upside and downside volatility.
- Net asset value erosion quickly becomes a problem for high-yield single stock covered call ETFs.
The high yield comes with some trade-offs
The YieldMax MSTR Option Income Strategy ETF does not follow a traditional covered call strategy. Instead of owning shares of Strategy outright, it synthetically creates long positions using options that approximate the price movements of the stock. With those in place, it then writes short-term covered calls to generate income.
However, the inherently high volatility in Strategy stock makes the risk/reward profile different. In general, covered call strategies work best in either lower-volatility or sideways-moving markets. These conditions usually mean that there’s a lower chance that the options will get called away. In that scenario, investors could hang on to the stock and keep the income from the sale of the options.
Tidal Trust II – YieldMaxTM Mstr Option Income Strategy ETF
Today’s Change
(8.00%) $1.88
Current Price
$25.39
Key Data Points
Day’s Range
$24.14 – $25.47
52wk Range
$19.17 – $126.50
Volume
18K
Strategy’s bigger price swings mean there are more opportunities for the options to be exercised and for the upsides from capital gains to be lost. The combination of full downside capture with limited upside potential really shows up in these ETFs.
MSTY vs. MSTR: A side-by-side comparison
MetricMSTYMSTRMethodologyCovered call strategy on MSTRBitcoin-adjacent equityDistribution yield75% currently, but variable0%1-year total return(46.3%)(53.3%)2-year total return(12.1%)(5.1%)Upside participationCapped at call strike priceUnlimitedDownside protectionPartial; premium income offsets lossesNoneBest use caseIncome + variable MSTR exposureBitcoin conviction playExpense ratio0.99%N/A
Data source: MSTY website.
Anyone anticipating that they’d buy this ETF and simply capture a 75% return can look at its historical total returns and see that this isn’t the case. It continues to generate weekly income as promised, but its net asset value erosion has completely overwhelmed the income component over time.
These types of funds could be useful to people looking for a steady income stream in the near term. But their underlying investment value is likely to keep shrinking over that time. Total return is ultimately the most important number of all.
I wouldn’t recommend investing in ultra-high-yield single stock ETFs. The yield figures that get the headlines end up masking some pretty unappealing total returns.
David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
