MSTY, BLOX, IWMI: Building A High-Income Portfolio with Risk Defense

Investors seeking income beyond traditional bonds now face three high-yield strategies that promise substantial returns but carry distinct risk profiles. The YieldMax MSTR Option Income Strategy ETF (MSTY) exemplifies extreme-yield tactics, targeting 90-190% returns through MicroStrategy call options. While this approach generated outsized income during crypto rallies, recent MSTR declines have eroded its NAV and distribution sustainability, exposing investors to amplified capital risk. Unlike leveraged funds like MSTW, MSTY sacrifices downside protection for yield, making it suitable only for portfolios with aggressive risk tolerance.

BLOX takes a crypto-linked approach through ETFs holding Bitcoin and Ethereum funds while using options to boost income. Its 36% distribution rate appears attractive but includes 40.9% return of capital, raising questions about long-term sustainability. Recent data shows the fund's NAV plunged 18.8% month-over-month, reflecting the extreme volatility inherent in crypto-linked assets. With a 1.03% expense ratio-nearly double the average ETF fee-BLOX demands investors accept both market whipsaws and fee drag for yield.

The NEOS Russell 2000 High Income ETF (IWMI) offers tax-efficient small-cap exposure through option strategies.

While its 88% return of capital distributions reduce taxable income, post-tax returns lag benchmarks, suggesting structural limitations. The fund's 0.68% expense ratio provides better value than BLOX but cannot overcome the inherent volatility of small-cap markets amplified by options selling. Unlike traditional dividend-paying stocks, these strategies prioritize yield generation over capital preservation, creating a fundamental tradeoff between income potential and downside protection. Investors must weigh whether the yield premiums justify accepting volatility that could erode principal during market stress.

ETF Performance and Capital Erosion

Our review now turns to evidence of capital erosion in several actively managed ETFs, revealing a stark contrast between yield promises and underlying realities. MSTY, which promotes a 100.69% distribution rate, has seen a staggering 92.88% of its recent distributions classified as return-of-capital, effectively returning investor principal rather than generating new income according to YieldMax data. This pattern is echoed by BLOX, whose distributions have included a 40.9% return-of-capital component alongside its 36% distribution rate, coinciding with a sharp 18.82% monthly NAV decline. Similarly, the NEOS Russell 2000 High Income ETF (IWMI) reports distributions that are 88% return-of-capital in recent periods, despite its strategy targeting tax-efficient income.

This heavy reliance on return-of-capital fundamentally erodes the ETF's asset base. When an ETF returns capital, it directly reduces the net asset value representing investors' original investment. While these ETFs may boast attractive distribution rates, the composition of those payouts means investors are often partially repaying themselves rather than earning sustainable profit. BLOX's significant NAV drop highlights the volatility and risk inherent in these concentrated, options-driven strategies, particularly given its exposure to crypto-linked funds. The sustainability of these high payouts is therefore questionable; continued return-of-capital distributions cannot be maintained indefinitely without depleting the fund's capital base.

For investors, this necessitates extreme caution. The high distribution rates advertised by these funds require close scrutiny of the return-of-capital percentage. A fund returning a large portion of capital may be signaling underlying weakness in the income-generating ability of its strategy or a portfolio that has been significantly marked down. The volatility observed in BLOX's NAV, coupled with the substantial erosion seen in MSTY and IWMI, underscores the potential for both capital loss and the failure of promised yields to materialize consistently. The apparent yield advantage must be weighed heavily against these principal erosion risks and the fund's ability to maintain its structure and income stream long-term.