Evaluating the Attraction of YieldMax TSMY’s High Yield Amid Elevated Risk in a Volatile Semiconductor Sector

For income-seeking investors, the YieldMax TSM Option Income Strategy ETF (TSMY) presents a tantalizing proposition: a distribution rate of 81.66% as of August 29, 2025, and a 30-Day SEC Yield of 2.44% [1]. However, this high yield comes with significant caveats, particularly in the context of a semiconductor sector grappling with geopolitical tensions, macroeconomic headwinds, and structural volatility. This analysis examines whether TSMY’s yield justifies its risks, comparing it to alternatives and contextualizing its performance within the broader semiconductor landscape.

TSMY’s Strategy: Yield at the Expense of Upside

TSMY operates by selling call options on Taiwan Semiconductor Manufacturing Company (TSM), capping potential gains from TSM’s price appreciation while generating income through premium collection [1]. As of August 2025, the fund had a 1-year return of 20.84% at NAV but has experienced a 27.2% decline in share price since inception, despite distributing $8.27 in dividends [3]. This underperformance underscores the inherent trade-off: while TSMY’s strategy limits downside risk through options, it also caps upside participation. For instance, TSM’s stock price surged 35% year-to-date in 2025, yet TSMY’s returns lagged due to its options-based structure [1].

The fund’s volatility is further amplified by its non-diversified, single-issuer focus. TSMY’s exposure to TSM—a company central to global semiconductor supply chains—subjects it to risks tied to U.S.-China tensions, export controls, and production delays [2]. For example, TSMC’s decision to phase out Chinese equipment in its 2nm production lines has increased costs and delayed timelines, indirectly impacting TSMY’s income-generating potential [2].

Sector-Wide Risks: A Perfect Storm for Semiconductor ETFs

The semiconductor sector in 2025 is navigating a perfect storm of macroeconomic and geopolitical pressures. TSMC’s dominance in advanced node manufacturing (90% market share) makes it a focal point for U.S. export controls, while its geographic concentration in Taiwan exposes it to geopolitical instability [2]. Meanwhile, U.S. government investments in domestic manufacturing—such as the $8.9 billion stake in Intel—signal a shift in global supply chain dynamics, creating uncertainty for TSMY’s underlying asset [2].

Moreover, the sector’s reliance on AI-driven demand is a double-edged sword. While generative AI chip sales are projected to exceed $150 billion in 2025, this growth is concentrated in a small fraction of wafer capacity, creating bottlenecks and pricing pressures [4]. For TSMY, this means that even as AI demand drives TSM’s stock price higher, the fund’s ability to benefit from these gains is constrained by its options strategy.

Risk-Reward Comparison: TSMY vs. Alternatives

TSMY’s risk profile is stark when compared to other high-yield, options-based ETFs. The YieldMax Ultra Option Income Strategy ETF (ULTY), for instance, offers a distribution rate of 88.51% but has seen a 48.98% decline in share price over the past 12 months [5]. Similarly, the YieldMax MSTR Option Income Strategy ETF (MSTY) has a 86.29% distribution rate but has lost 30.43% of its value in the same period [5]. These examples highlight a common theme: high yields in options-based ETFs often come at the cost of principal erosion, particularly in volatile markets.

In contrast, diversified semiconductor ETFs like the VanEck Semiconductor ETF (SMH) and the SPDR S&P Semiconductor ETF (XSD) offer lower yields but greater stability. SMH, with a 0.35% expense ratio and a 39.69% one-year total return, is heavily weighted toward Nvidia and TSM but mitigates single-issuer risk through broader exposure [5]. XSD, which limits any single stock to 4.5% of its portfolio, has delivered a 16.92% one-year return while reducing concentration risk [5]. For income-seeking investors, these alternatives provide a more balanced approach, albeit with lower yield potential than TSMY.

The Case for Caution: High Yield, High Trade-Offs

TSMY’s appeal lies in its ability to generate monthly income, but this comes with several trade-offs. First, the fund’s distributions may include return of capital, which can erode net asset value (NAV) over time [1]. Second, its high portfolio turnover and reliance on options expose it to counterparty risk and liquidity constraints [1]. Third, the fund’s performance is inextricably linked to TSM’s stock price, which remains volatile due to sector-specific and macroeconomic factors [2].

For investors prioritizing income, TSMY’s yield is attractive, but its risks may outweigh its benefits in a downturn. Consider the Direxion Daily Semiconductor Bull 3x Shares (SOXL), which offers leveraged exposure but is unsuitable for long-term income strategies due to compounding volatility [1]. Similarly, the iShares Semiconductor ETF (SOXX) provides a 0.34% expense ratio and strong liquidity but lacks the high yield of TSMY [4].

Conclusion: A High-Risk, High-Reward Proposition

TSMY’s high yield is a compelling feature for income-seeking investors, but its risks—concentration, volatility, and structural limitations—demand careful consideration. In a semiconductor sector marked by geopolitical uncertainty and cyclical demand, the fund’s options-based strategy may not provide the downside protection investors expect. While alternatives like SMH and XSD offer more balanced risk-reward profiles, TSMY remains a viable option for those willing to accept elevated volatility in exchange for monthly income. However, as the sector’s dynamics evolve, investors must weigh the allure of high yields against the potential for principal erosion and market-driven losses.

Source:
[1] TSMY, TSM Option Income ETF [https://www.yieldmaxetfs.com/our-etfs/tsmy/]
[2] The Geopolitical and Economic Risks of U.S. Dependence [https://www.ainvest.com/news/geopolitical-economic-risks-dependence-foreign-semiconductor-manufacturing-2509/]
[3] Taiwan Semiconductor Stocks: Analyzing TSM Vs. TSMY [https://www.forbes.com/sites/investor-hub/article/taiwan-semiconductor-stocks-tsm-vs-tsmy/]
[4] 2025 global semiconductor industry outlook [https://www.deloitte.com/us/en/insights/industry/technology/technology-media-telecom-outlooks/semiconductor-industry-outlook.html]
[5] 7 Best Semiconductor ETFs to Buy in 2025 [https://money.usnews.com/investing/articles/best-semiconductor-etfs-to-buy]