Tim Plaehn is out with another “huge monthly dividends” pitch… only this time, it’s tied in with some hot tech stocks like NVIDIA… and even with Bitcoin.

So what’s the story?  Here’s how the ad gets our attention:

“Nvidia pays a 16-cent dividend?

“Tell that to the $1,093 I can collect from 1 share…

“That’s a 683,025% difference…

“And it’s as easy as buy and hold…

“… Which means ANYONE can do this!

“Or Coinbase…

“It doesn’t even pay a dividend…

“Yet here I am with $1,398 per year from just a $1k investment…

“That’s all thanks to this secret 140.07% high yield…

“Available right now on Coinbase, plus more… “

That “more” includes some other hot ticket tech stocks, like Tesla (TSLA, 51.15% yield), Amazon (36.78% yield), Apple (27.36%), etc…. and a lot of promise about how these massive monthly dividends will cover your living expenses and give you a free and easy retirement…

“With yields as high as 140.07% on a single investment…

“You TOO can enjoy a massive income stream fast. 

“But don’t worry, because this isn’t some “silver-spoon” strategy…

“Regular Joes are living their best now thanks to this new income secret and the fast monthly payouts it unlocks…

“This NEW investment makes it possible to SKIP decades of compounding and enjoy life-changing monthly income NOW

“This is the biggest “bandwagon” opportunity in decades…

“The floodgates are OPEN and nearly every major stock on the market now has a SECRET way to collect 5X… 20X… 100X BIGGER Yields

“… Yet most investors have no clue!”

So what’s the story? As you’re probably guessing, Plaehn is pitching ETFs here, though of course what he’s actually pitching is a subscription to his service that recommends these investments, which he calls ETF Income Maximizer ($49/first year, renews at $99/yr), a newsletter that seems to be the “junior” version of his more expensive ETF Income Edge.

This is how he describes the ETFs he’s recommending:

“This brand new system that was recently developed…

“That combines the fast potential of big income from leveraged options…

“And the stability and ease of collecting a dividend payment…

“… to collect reliable monthly income.

“This is as easy as buying a normal stock

“…No special account privileges or experience needed….

“The simplicity of buying an ETF with the returns of a complicated options trading strategy…

“This is how you get your income ignited for maximum gains in 2024…

“By investing in NEW options ETFs.

“That’s right, we’re simply holding ETFs and enjoying yields as high as 140.07%.”

So what is Plaehn pitching? These are the single-stock YieldMax ETFs that have gotten pretty popular over the past year — here’s how YieldMax describes them:

“YieldMax™ ETFs seek to generate monthly income by pursuing options-based strategies on one or more underlying securities. YieldMax™ ETFs aim to harvest compelling yields from assets that are not typically associated with monthly income.

“The funds do not invest directly in the underlying stock or ETF.”

There are about a dozen single-stock offerings from YieldMax, ranging from NVIDIA and Tesla to Bitcoin and some more diversified strategies, like the Magnificent Seven “fund of funds” ETF (YMAG), and there’s even an options income take on the GDX Gold Miners ETF (YieldMax ticker GDXY). There is at least one “real” covered call ETF in there, too, YieldMax Ultra Option Income (ULTY), which owns hot stocks and sells calls on them, but the others, including the single-stock ETFs, all do essentially do the same thing: they put most of the capital into T-Bills, and then sell options on the given stock to generate monthly income. NVIDIA is one of the more popular ones at the moment, so we’ll use that as an example — here’s their description of the YieldMax™ NVDA Option Income Strategy ETF (NVDY):

“The YieldMax™ NVDA Option Income Strategy ETF (NVDY) is an actively managed fund that seeks to generate monthly income by selling/writing call options on NVDA. NVDY pursues a strategy that aims to harvest compelling yields, while retaining capped participation in the price gains of NVDA.

“The Fund does not invest directly in NVDA.

“Investing in the fund involves a high degree of risk.

“Single Issuer Risk. Issuer-specific attributes may cause an investment in the Fund to be more volatile than a traditional pooled investment which diversifies risk or the market generally. The value of the Fund, which focuses on an individual security NVDA, may be more volatile than a traditional pooled investment or the market as a whole and may perform differently from the value of a traditional pooled investment or the market as a whole.

“The Fund’s strategy will cap its potential gains if NVDA shares increase in value. The Fund’s strategy is subject to all potential losses if NVDA shares decrease in value, which may not be offset by income received by the Fund. The Fund may not be suitable for all investors.”

Does that work? Sort of.  You cap the exposure on the upside, without capping it on the downside, and that is expressed with options you sell, which then generate cash flow as you sell that exposure above the upside cap.   That creates income, in place of that potential upside.  These funds sell (and buy) short-term options (1-2 months), so they generate a lot of trading, and the returns from those trades are turned into very high monthly dividends — but it’s best to think of those dividends as usually just a replacement for the capital gains that would otherwise stay with the shares (assuming the stock is going up). You get some exposure to the rise in the stock, effectively, but you get it in the form of a cash dividend, not a “paper gain” inside your portfolio.

I keep seeing more questions about the various YieldMax (and similar) options income ETFs, and that universe of products keeps growing — it’s a little nutty, but because of the huge options premiums out there for high-growth stocks like NVIDIA, the option-selling income from those ETFs can indeed be gargantuan in any given period of time. The challenge is that selling covered calls or call spreads, which is sort of what these ETFs do, leads to relatively high operating costs and turnover, including churn as the calls you sell are exercised and you have to then buy the stock at a higher cost and sell more calls… the total return of these offerings, which are all pretty new, has generally been disastrous in comparison to the underlying investment.

The more diversified ETF that Tim Plaehn was pitching a few weeks ago, which was essentially a way to get covered-call options income from zero-day options, has lagged its index… and the stock-specific YieldMax ETFs are mostly lagging the stock they’re based on, too.

The interesting thing is that this might not be the case forever — there is potential universe where these big stocks, like NVIDIA or Tesla or whoever, go into a slow decline, or just a flat period, for a year or two, and it’s at least possible that the YieldMax ETF might outperform the stock itself during that time, mostly by going down more slowly than the actual stock because of that option income (though in a decline, the option premiums would likely fall, too).

So I’ve got a little worm in the back of my head that keeps telling me something like this:

If you wanted to sell your NVDA position, because you think it’s about to begin a multi-year decline, this might be a decent way to effectively sell it slowly, without giving up all the potential exposure if you’re wrong and NVDA keeps rising (though you would give up more than half of the upside if it does keep going up, probably).

And the same is true of some of the other YieldMax ETF offerings, like Tesla or Amazon, though it’s really just a nebulous thought for me at this point. We have very little evidence of how these new ETF’s will really react during a market decline, we have only the limited evidence that more diversified covered-call ETFs tend to be cushioned somewhat from declines in the overall market.

And I should be clear, these are options income strategy ETFs… but they’re not as simple as “covered call” ETFs, even though they act sort of the same way. They’re more levered than that, because they use options that are near-the-money, but also sell puts to help pay for the calls they buy, and then more income comes from the higher-priced calls they sell against that core call option position. In fact, it’s largely just a strategy that captures the option premium at current prices, with a strongly positive bias and no downside protection, so I guess the potential for resilience in a falling market is really just because their core holding in T-bills won’t go down (or won’t go down too much, assuming they deal with the put options they sell in some effective way).

This is the recent portfolio for the NVDY ETF, so you can see they’re not actually just holding NVDA and trading around it… they’re manufacturing income and some upside exposure to NVDA by selling at-the money puts and using that cash to buy at-the-money calls, while having a big of a covered call spread on top of that. All backed up by having almost all their capital, 80-90% or more, depending on the moment, in T-bills.

I pulled this data last week, but you can see that the core option stake is long a $113 call and short a $113 put, so essentially selling that put pays for the call option, and then they have a little bit of a “covered call” spread on top of that with tiny sales of the calls at slightly higher prices. Those big distributions come from when they roll over the big profits from the NVDA calls, like that $113 call that has doubled, perhaps at no cost if the $113 put expires worthless in July, and distribute those profits to ETF holders, and build the next position similarly.

But they’re more active than that — now, according to the YieldMax website, the core put and call position has rolled over to be long August $127 calls, with $135 and $137 calls for earlier expirations sold against that, and short August $127 puts (to pay for those $127 calls).   We don’t know yet what earnings might have been generated from that roll of the options positions to the next month, but there would have been a nice profit because the stock went up, so the calls made money and the puts could be bought back cheap, and whatever that trading gain was will feed into the next monthly dividend.

That kind of trading has paid for for big distributions recently, so the monthly payout for June was $2.56, obviously a lot of money with the ETF trading at about $31, but they’re also extremely irregular payouts — May was $1.20, and the lowest distribution, back in November, was 41.5 cents. If you could annualize those payouts, then 12X 2.56 would be $30.72, so that’s close to a 100% annual yield from the current $31 share price for NVDY. But that’s not how it has worked so far, of course, because the payments vary.

Cash and Treasuries are about 93% of the ETF’s value today, with the core August $127 call worth another 10%, and the short put position a negative 6%, so that cash will presumably used for the next distribution… but as long as the T-Bills don’t have to get liquidated to close out the put options that were sold, this theoretically works pretty well because the risk is confined to the net cost of the trades, and that cost is pretty low because you sold those put options to buy the call options.

I imagine the risk comes if there’s a very sharp downside move, which could mean those put options drag a lot more on the net asset value,  perhaps losing just as much money, or more, as the call options made when the stock was soaring.  It seems pretty likely that those put options will provide very similar downside risk to whatever you’d have from owning NVDA shares themselves, perhaps more if the timing works out to really leverage the loss from those put options.

I confess that the variability of these more aggressive covered call ETFs makes my head spin a little. The one that always catches folks’ attention is NVIDIA, since that’s everyone’s favorite stock now, and the YieldMax distribution has recently been at a more than a 100% annualized rate for that one, but others are very high, too, including the Coinbase COIN YieldMax ETF (CONY) at almost 90%, and the Amazon YieldMax ETF (AMZY) at more than 50%. Those are far from being net yields, of course, since the share prices of all of those ETFs are declining relative to the underlying stock, but still, maybe it’s an interesting way to sell slowly, particularly because selling is the hardest part of managing a high-growth stock.

The potential is unknown, but what tempts me is how well a YieldMax ETF might perform when things are not going great for the underlying stock. And there’s a little bit of promise there, but not a ton — the oldest of these single-stock YieldMax ETFs is the YieldMax TSLA Option Income Strategy ETF (TSLY), which is of course based on Tesla shares… and here’s the chart of the total returns for those two,  starting at the July 2023 highs:

That’s a surprise, a pretty solid “beat” for the YieldMax offering — it’s not a big outperformance, but it’s something.  TSLY shareholders lost a little less than TSLA shareholders during that period, because TSLY was cushioned by the net income from the options selling. It was still barely enough, but that’s the only example I’ve been able to find of a YieldMax ETF really outperforming the stock it’s based on for a period of more than a few weeks.

So if you wanted to sell some Tesla when it was at the highs, maybe just shifting to TSLY was a reasonable way to gradually sell Tesla as it fell, by collecting those dividends, and you didn’t miss out on anything.

Of course, that presupposes that you knew that was the top for TSLA shares.  The only scenario where TSLY wins is really the “buy near the top” scenario, which means you win by losing less.  If you just bought the TSLY ETF at inception, the total return has pretty consistently lagged during times when TSLA shares were flat or going up, similar to what we see with most of these options income strategy ETFs:

And the same is true of the others, I expect, though I haven’t run the charts for every single one — NVIDIA’s stock has consistently beaten the YieldMax NVDY ETF, no surprise there given NVDA’s extreme returns since the ETF was launched, and the fact that part of the options income comes from capping your potential returns…

But during the brief time when NVDA fell 15% from its March high (before bouncing back), NVDY fell only 10%…

And to cherry pick a time period when NVDA stock was roughly flat for a few months, from June to November last year, we can see that there’s some benefit to options income during those time periods…

Which means that in the end, this is probably mostly a somewhat cowardly way of doing some market timing… and I do enjoy a bit of cowardice from time to time, so maybe those who want to sell-without-really-selling will find solace here… but I’m not sure it’s worth the work and the risk, along with the pretty steady drag on results that we should see from these kinds of investments if the underlying stock is in a flat-to-gradually-rising period.

It’s tempting to think of these as “turn your stock position into income” investments, and they sort of are — but note that all else being equal, the level of income should decline over time as the fund effectively chops off chunks of itself to provide you with that income.

On average, my bar napkin calculations indicate that if the stock remains in a pretty strong bull market… you are likely to give up about half of the returns if you use an options income strategy.  That’s the price for having a somewhat moderated downside risk, capping your short-term returns, and turning part of your position into income.  You smooth out the return — but so far, that smoothing takes much more from those upside peaks than it does from the downside troughs.

And in a really ugly bear market, like a 30% collapse in a couple months?  We don’t know.  None of these YieldMax ETFs have been around for that, and they would also be impacted by the fact that in a bear market, folks would probably sell those ETFs, which might hurt their ability to close out those options trades as optimally as they might hope.

Still, I wonder — might these YieldMax ETFs be a half-assed way to bet that the stock has peaked, and to start turning a highly-valued stock into income, without getting completely out?

Interestingly, I think the YieldMax ETF that is doing best at this point is the one based on Amazon, for reasons I don’t understand — maybe just relatively high options prices but not all that much actual stock volatility.  The total return for the YieldMax AMZN ETF (AMZY) is slightly outpacing AMZN at this point, by a little bit, despite a lack of any real decline in AMZN shares.

And Microsoft, whose stock has had a fairly similar path, is likewise holding up OK — this is YieldMax MSFT (MSFO) vs. regular ol’ MSFT:

Though I should note, part of the reason here is probably that the options premiums are not as extreme, and therefore the yield is not as extreme, and the stocks maybe haven’t moved so dramatically that they blew out the covered call sales.  Just a guess there.

And, of course, those total returns don’t mean you’re getting any free money, they just mean that including the dividends, you’re keeping up with the underlying stock.  The tax impact of that might vary, but really this is the way in which this becomes  a strategy of “selling slowly”  — these ETFs that have kept up in terms of total return have done so by distributing fairly large dividends, so the share price still falls.  Or lags, at least.

Here’s the actual ETF share price performance, ignoring the dividends, for AMZN and AMZY… your total return kept up if you held AMZY, but it kept up because the dividends roughly made up for the 35% worth of gains you didn’t get in the share price.

And the same is roughly true for MSFT and MSFO:

At the risk of beating this idea to death, I should note that I thought the Alphabet YieldMax ETF (GOOY) would end up being pretty similar to the MSFT and AMZN ones… but it’s way off. I don’t know for sure why, though it could just be the steadier slope of the line on the chart for MSFT and AMZN, with GOOGL being more volatile. Here’s the total return, including dividends, of GOOGL and the YieldMax GOOY ETF since inception (almost a year ago):

So it works OK sometimes, and fails dramatically sometimes, and I don’t know that I’d be able to pick the ones that will work from the ones that won’t.  So I’m not ready to get involved in this high-yield, often (not always) poor return strategy… but I can see the attraction.

If dividend income is important enough to you to make that possible total return sacrifice, I’d just urge you to keep your expectations low — don’t start daydreaming about 100% yields without paying a cost.

If you had bought the NVDY ETF when it launched, about a year ago, you would have gotten a fantastic return from the dividends — you would have paid about $23.50 per share for that ETF, and over the next 13 months you would have collected $16.20 in dividends.  That’s a 70% total dividend yield for a year plus one month — pretty impressive.  And the ETF rose in value, too, by about $8, getting up to $31.50 or so, which means the total return for owning NVDY was roughly 100%.  That’s nothing to sneeze at… but the total return for NVDA itself was a little over 200%, so you gave up on half of that in exchange for essentially turning part of your NVDA position into income.

NVDA is the most extreme example of this, since the stock has soared so dramatically, but that’s the general idea — you can get some exposure to a rising stock and some high dividends, but doing so means you risk giving up on some of the potential upside.  And we’re not entirely sure what the downside risk might be, should things fall apart for the stock… but since the fund is selling put options, there’s at least the potential for it to get ugly if the stock falls very abruptly.   Often, in lesser declines, we’ve seen that the YieldMax ETFs don’t go down quite as much as the actual stock does… and that’s something, but none of these ETFs are much more than a year old, so all we’ve really seen so far are those “lesser declines.”

Here’s one more example, because I think the fact that the stock has had two big one-day moves so far this year, but has not been a high-octane growth stock, helps to illustrate the potential and the challenge — this is the total return, including dividends, for Disney (DIS) and the YieldMax DIS Option Income ETF (DISO), you can see that when the stock soared in February, the DISO ETF only registered a little piece of that gain… and when it collapsed more than 10% in May, the DISO ETF fell almost as much as DIS.   DISO actually outperformed nicely if you bought right before that May drop, it lost about 12% over the past month or so, versus 17% for DIS, but that wasn’t enough to make up for the gains missed in February:

So there you have it — yes, you can get extreme levels of income from some hot stocks by buying these YieldMax ETFs… and in some cases, it has worked out OK and you haven’t given up a lot in the way of total return, at least in the case of AMZN/AMZY and MSFT/MSFO, you could have used those ETFs as a way to turn your equity stake into fairly high income, without losing touch with the stock completely.  There’s no net gain there, you would have done exactly as well if you had just held AMZN and sold a couple shares each month, rather than using the AMZY ETF to do something similar for you… but there was no net loss, either.

The challenge is twofold, as I see it:  First, that most of these ETFs have not worked out as cleanly as MSFO and AMZY, it’s much more typical for them to lag way behind the base stock when it comes to total return, perhaps just because they miss out on any sharp upward moves; and Second, that although we have a couple examples of the YieldMax ETFs offering a little cushion during a time when the underlying stock is falling over a period of a couple months (like with TSLA/TSLY, or DIS/DISO), we don’t really know what the impact of a more sustained bear market might be, or of a more dramatic collapse in the share price of the underlying stock.  There just aren’t many examples in the short history of these YieldMax ETFs.

Sadly, then, we’re forced to conclude that there’s still no such thing as free money.  You can use options to generate income, either by yourself or with these levered funds, but using leverage and using options always comes at a cost, too — if you’re lucky, the cost is just the obvious one, that your total returns are capped in exchange for turning some of your gains into income, and you know that up front and accept that tradeoff, as many folks do with more conventional covered-call strategies… but I think we’ll have to see these ETFs survive through some different kinds of markets before we really learn if there are other costs to be paid by following this particular strategy.

That’s just what I think, though, and I know some people rely on dividends for income and worry much less about whether they’re maximizing their total return, so maybe these kinds of investments will ring your bell.  If you’ve had experience with these YieldMax ETFs, or have reasons you think folks should consider them or avoid them, please chime in below, our happy little comment box awaits your input.  Thanks for reading!

Disclosure: I do not own any of the YieldMax ETFs mentioned above, but do own shares of and/or call options on NVIDIA, Alphabet and Amazon, and I own some Bitcoin.  I have stop-loss trades entered for NVIDIA that could trip at any time, but I will not alter those trades or otherwise trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.