YieldMax ETFs: High-Yield Mirage or Risky Reward?

The YieldMax ETFs—YMAG and YMAX—promise eye-catching yields, with 30-day SEC figures of 46.89% and 58.84%, respectively. But beneath these numbers lies a complex web of risks that could turn their lofty income streams into a trap for unwary investors. These "funds of funds" employ leveraged option strategies to generate high payouts, yet their structural flaws—from NAV erosion to concentration risk—make them better suited for speculative bets than core income portfolios. Let's dissect the reality behind the returns.

The Allure of Option Income: How YMAG and YMAX Work

Both ETFs use a "fund of funds" structure, investing in other YieldMax™ ETFs that deploy covered call strategies. Here's the basics:
- Covered Calls: The underlying YieldMax ETFs sell call options on stocks they own (e.g., Apple, Amazon, or Tesla). This generates premium income but caps upside potential if the stock rises.
- Monthly Distributions: Investors receive payouts—often including return of capital—which are marketed as "high yield."

The strategy sounds simple: collect premiums while capping gains, then distribute the cash. But the devil's in the details.

YMAG: The "Magnificent 7" Concentration Trap

YMAG focuses on seven "blue-chip" companies—Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla—each represented by a YieldMax™ ETF. Its equal-weighted monthly rebalancing aims to smooth returns, but concentration is its Achilles' heel:

Example: Tesla's stock price dropped 22% in Q1 2024 alone, dragging down YMAX's NAV.

Key Risks for YMAG:
1. Capped Upside: If Apple or Tesla surge, YMAG's gains are limited by sold call options—yet it still bears full downside risk.
2. NAV Erosion: Distributions (e.g., $0.6365/month) often include return of capital, shrinking NAV. By July 2024, YMAG's NAV had already dipped to $20.21 after cumulative payouts.
3. New Fund Risk: With only six months of data, its performance (6.98% 1-month return vs. the S&P 500's 11.51%) hints at volatility, not stability.

YMAX: Diversification's Double-Edged Sword

YMAX casts a wider net, holding over a dozen YieldMax™ ETFs including AMDY (AMD), CONY (Coinbase), and thematic funds like AIYY (AI). This diversification boosts its headline yield to 58.84%, but it introduces new vulnerabilities:

YMAX's 1.28% expense ratio is nearly double the average of safer dividend ETFs.

Key Risks for YMAX:
1. Liquidity Risks: Smaller ETFs like XOMO (ExxonMobil) or OARK (AI-focused) may lack trading volume, worsening slippage costs.
2. Counterparty Exposure: Options trades rely on clearinghouses; defaults here could amplify losses.
3. Thematic Volatility: Thematic funds (e.g., AIYY) are inherently speculative, compounding YMAX's swings.

Even with diversification, YMAX's NAV fell to $20.22 by June 2024, just 0.05% above its launch price—a meager 12.99% return since January. Meanwhile, the S&P 500 outperformed by nearly 10%.

The Structural Flaws Underpinning Both ETFs

1. Return of Capital (ROC): Both funds explicitly state that distributions may return investor principal. Over time, this erodes NAV, turning "income" into a slow-motion capital loss.
2. Option Strategy Limits: The "covered call" approach works best in sideways or bearish markets. In rising markets, it leaves gains on the table—a losing proposition if the bull market resumes.
3. Expense Drag: Combined fees (1.28%) eat into returns. For every $1,000 invested, ~$12.80/year is lost to fees—money that could offset ROC-related losses.

Investment Verdict: Proceed with Extreme Caution

While YMAX's diversification offers a slight edge over YMAG's concentration, both ETFs are high-risk vehicles unsuitable for core income portfolios. Their yields are not guaranteed and depend on:
- Stable market conditions (no prolonged rallies or crashes).
- Sustained demand for options premiums.
- Minimal NAV erosion from ROC.

Both trade at slight discounts to NAV, suggesting investors already doubt their sustainability.

Actionable Advice:
- Avoid Core Holdings: Use these ETFs only as speculative side bets, not retirement income sources.
- Check Underlying Positions: Avoid YMAX if you dislike thematic ETFs or counterparty risk.
- Monitor ROC: Track distributions—any payout exceeding the fund's net income is a red flag.

For safer income, stick to dividend aristocrats (e.g., Coca-Cola, Procter & Gamble) or high-quality bond ETFs (e.g., BND). If you insist on YieldMax, treat it like a gamble: invest small, and never bet money you can't afford to lose.

The YieldMax ETFs are financial fireworks—spectacular but fleeting. Their high yields are real, but so are the risks. Proceed with eyes wide open, or walk away.