From Nasdaq
May 19, 2025 01:21:00 PM:

ETFs are becoming more complex with the rise of actively managed and derivative-backed products. Recent regulatory changes have made it easier for providers to launch these ETFs. New derivative-based ETFs fall into three categories: Buffer or defined outcome, leveraged or inverse single-stock, and option-based income. Some combine options-selling strategies with leveraged single-stock ETFs.

ETFs that trade options on single stocks to generate high yields are popular but generally underperform the underlying stocks. YieldMax is a leader in this niche, offering high distribution rates but often lagging behind the stocks they track. Despite their popularity, only two out of 24 YieldMax ETFs outperformed their respective stocks.

YieldMax ETFs generate income by selling call options and holding Treasury securities for collateral. The fund manager sells call options with expirations of one month or less and strike prices above the current share price to generate monthly income. The YieldMax Reddit community discusses using these ETFs for income generation and retirement planning.

The four most popular YieldMax ETFs are linked to volatile stocks, attracting over $1 billion in assets each. Yields are calculated by annualizing the most recent monthly payout and dividing it by the fund’s latest NAV. However, yields can vary significantly due to fluctuations in the underlying stock and other factors.

Key YieldMax ETFs, such as MSTY, TSLY, NVDY, and CONY, have different performance metrics compared to their underlying stocks. While some have offered substantial returns, others have underperformed significantly. Investors should consider the risk-reward profile of single-stock option income ETFs compared to diversified ETFs.

Investing in single-stock option income ETFs requires a bullish outlook on a specific stock. While these ETFs may outperform if the stock remains range-bound, investors should be aware of the potential risks and tax treatment. Understanding the workings of these complex products is crucial for investors.

Overall, the rise of complex ETFs provides investors with unique income opportunities but also comes with specific risks. Investors should carefully assess their risk tolerance and investment goals before considering these products.

Read more at Nasdaq: High-Yield ETFs: Big Payouts, Bigger Trade-Offs?