Why YieldMax's High-Yield Gamble Could Backfire in the Long Run

Theodore QuinnFriday, Apr 11, 2025 3:31 pm ET
36min read
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The YieldMax Magnificent 7 Fund of Option Income ETFs (YMAG) has captured attention with its eye-popping yields and aggressive income-generating strategies. Yet beneath the surface, its structure and risks suggest a path toward long-term underperformance. While YMAG’s 20.38% annualized return since its January 2024 launch has outpaced the S&P 500’s 4.28% three-month return as of June 2024, its reliance on volatile options strategies, unsustainable distributions, and structural headwinds pose significant threats to investors’ capital. Here’s why caution is warranted.

The Allure of High-Yield Illusions

YMAG’s headline-grabbing metrics—like a 46.89% SEC yield in June 2024 and a projected 53.70% distribution rate in early 2025—paint it as a golden goose for income seekers. But these figures mask critical flaws.

First, options-based income is not free money. By selling call options on the Magnificent 7 stocks (AAPL, AMZN, GOOGL, FBY, MSFT, NVDA, TSLA), YMAG collects premiums but forfeits upside potential. As of July 2024, the fund held equal stakes in YieldMax ETFs for each name, with minimal cash reserves (-0.01%). This means if any of its underlying stocks surge, YMAG’s investors miss out entirely.

Second, distributions are eroding NAV. The fund’s April 2025 distribution of $0.0973 per share (a sharp drop from June 2024’s $0.6773) suggests declining income generation. Worse, SEC yields exceeding 69.89% as of March 2025 likely include return of capital, which reduces NAV and creates a hidden loss for shareholders.

The Volatility Tax

YMAG’s monthly rebalancing and reliance on derivatives amplify price swings. Its -14.27% worst drawdown in August 2024 (per April 2025 data) underscores this risk. While the fund’s 0.15% bid-ask spread suggests liquidity, extreme volatility could widen gaps during market stress.

The fund’s 1.28% expense ratio further drains returns. Over time, this eats into gains, especially if the market enters a prolonged downturn. For context, the average S&P 500 ETF charges 0.09%, meaning YMAG’s fees are over 14x higher.

The Math Against Long-Term Success

Let’s stress-test YMAG’s assumptions:

  1. Distribution Sustainability:
  2. To maintain a 53.70% distribution rate (as projected in early 2025), YMAG would need to generate $5.37 in annual income per $10 share.

  3. But its 2024 return of +36.05% already relied on volatile premiums and selling downside protection. If the Magnificent 7 underperform—or if rates rise—this income could collapse.

  4. NAV Erosion:

  5. If 30% of distributions are return of capital (a conservative estimate given 2025’s 69.89% SEC yield), a $20 NAV could drop to $14.00 over five years, even with steady returns.

  6. Opportunity Cost:

  7. By capping upside, YMAG misses out on growth. For example, if AAPL rises 20% in a year, YMAG’s investors gain nothing beyond the option premium—a costly trade-off in a bull market.

A Structural Time Bomb

YMAG’s monthly rebalancing forces constant churn, increasing transaction costs and tax liabilities. Meanwhile, its exposure to counterparty risk (via options contracts) adds another layer of fragility. If a derivatives counterparty defaults, the fund’s NAV could crater abruptly.

Conclusion: The High-Yield Mirage

YMAG’s short-term outperformance is a siren song. Its 20.38% annualized return since launch looks impressive, but it’s built on a foundation of borrowed time.

  • Distribution Risk: With yields at 53.70%+ and a 69.89% SEC yield, return of capital is inevitable. This will erode NAV over time, turning “income” into a mirage.
  • Volatility Drag: The -14.27% drawdown in 2024 and monthly rebalancing costs will punish long-term holders.
  • Strategic Flaws: Capping upside while exposing full downside is a losing bet in a rising market.

The S&P 500’s 3.59% monthly return in late 2023 (vs. YMAG’s 6.98%) hints at this disconnect. Over five years, a 2% annual outperformance by the market would leave YMAG’s investors far behind, even accounting for its fees.

Investors chasing yield should heed the warning signs. YMAG’s high returns are a function of leverage and luck, not a sustainable strategy. The writing is on the wall: this fund’s structural flaws make long-term underperformance all but inevitable.