Sunday, July 20, 2025

"Yield Magicians"

Jason Zweig went after some of the crazy high yielding derivative income funds. I don't use any of the YieldMax funds or any of the other crazy high yielders but obviously I have fun looking at them.

The one firefighter I mentioned on Saturday where our conversation drifted into investing and finance is a big fan of the derivative income funds and owns several but he didn't mention YieldMax specifically. A lot of people own them based on the AUM in the space.

Zweig isolated a couple in particular including the YieldMax Moderna Option Income Strategy ETF (MRNY) noting that MRNY fell "80% from May 2024 to May 2025." 


I'm not sure the catastrophe here was using MRNY. If you are ever going to use one of the crazy high yielders, you have to be favorably disposed to the underlying common stock. The catastrophe was caused by being favorably disposed to Moderna. To the left of the chart you can see where the covered call strategy really capped the upside of the spike in the common stock but MRNY total return has been quite close the rest of the time. 

MRNY is not best thought of as a proxy for MRNA, it is a product that sells the volatility of MRNA.

In the period backtested, I would say MRNY's total return was much closer to the common that I would have expected which might be because there was rarely capped upside. 

Over the last 12 months, Netflix (NFLX) has been up 88%. Using the same timeframe as Zweig for backtesting;


It's not terribly apparent on the chart where the total return line was capped from the call writing but obviously the total return lagged the common by a wide margin. Again though, NFLY is not the common stock it is a product that sells the volatility of the common stock. 

Last one, a stock that had a fine 12 months, not a barn burner like Netflix and not a catastrophe like Moderna.


Again, the lag for APLY total return is meaningful but something that yields 26.85% (per the YieldMax website), is very unlikely to keep up with that yield. We've talked about these as sort of being depleting assets. In a portfolio that tries to barbell a lot of yield out of a narrow slice of the portfolio, a crazy high yielder should be expected to go down and then reverse split eventually like the Tesla YieldMax has done. Sized very small, the depletion would not be problematic for the portfolio, it would be a big chunk of the portfolio's yield.

A crazy higher yielder that sells the volatility of some common stock isn't going to go to zero unless the underlying common goes to zero. The crazy high yielder might go down a lot, will probably go down a lot and then reverse split (repeated for emphasis), that is probably the right expectation as long as the common doesn't go to zero. 

Elisabeth Kashner from Factset is quoted in the Zweig article as saying "It’s risky enough to go into a single volatile stock." The crazy high yielders are almost like a bond <ducks out of the way>. If you buy a stock like Moderna, Netflix or Apple (maybe to a slightly lesser extent) you are expecting it to outperform. If you buy a YieldMax all you need is for the common to not drop 80% (or some other catastrophically bad amount). A stock that is sideways or down a little is not a catastrophe for a YieldMax product, the stock doesn't need to go up for relatively favorable outcome for the YieldMax...kind of like a bond. Obviously the volatility profile of a YieldMax fund will be nothing like that of a bond for the same company.  

I have no idea what JP Morgan stock will do over the next 12 months but it is a good bet it won't go out of business. Buying a short term JPM bond on that basis isn't a terrible idea. To buy the JP Morgan YieldMax (JPMO), you'd need some basis to believe the common won't crater but the YieldMax as an asset likely to deplete at some rate of speed won't implode on a total return basis if the stock meanders or even struggles. Down 80% like with Moderna, yeah there's no way to paint that favorably. 

A quick technical note is that YieldMax funds are not simply a covered call. The funds maintain an options combo of being long a call and short a put to create a synthetic long position and then sell a call option above the strike of the long call. If you don't know what any of that means, you should probably learn before doing any other research.

A more serious issue is one that Dave Nadig has isolated a few times which relates to the YieldMax distributions being recharacterized after the fact. The JPMO fund page shows that the 6/18 distribution was 87.32% return of capital and the rest as income. Believing that to be the case and then it changing later would be difficult to keep up with. 

I am extremely unlikely to ever use a YieldMax fund beyond some sort of experiment in my own account (have not done this) but I think it is important to look at them through the right lens. And even if I don't ever use a YieldMax product, maybe the next iteration of derivative income funds is more usable or maybe the iteration after that. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

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"Yield Magicians"

Jason Zweig went after some of the crazy high yielding derivative income funds . I don't use any of the YieldMax funds or any of the oth...