YieldMax, a US options-based income specialist, has launched a fourth actively managed exchange traded fund (ETF) targeting volatile semiconductor stocks as a source of high yields for income investors.
The London-listed YieldMax Semiconductor Option Income UCITS ETF (CHPY) uses a complex variation of a “covered call” strategy which aims to minimise the amount of upside this approach can give away from global stocks such as Nvidia, Broadcom, ASML and Taiwan Semiconductor Manufacturing Company.
Conventional covered calls enable a fund to sell “call” options on stocks they own to other investors who get the right to buy the stock if its price rises above a “strike” price. If the stock does this, the fund receives the premium or payment for the “short” call plus a rise in the stock up to the “strike” price, but loses any gains above that.
If the stock falls, the fund keeps the premium, thus offsetting some of the loss, enabling promoters of this kind of fund to say they are defensive.
The premiums are distributed to its own investors as income every month.
HanETF, the ETF platform on which YieldMax’s funds can be bought in Europe, says: “These ETFs aim to provide enhanced income, especially in flat or moderately bullish markets, although they may underperform in strongly rising markets as potential upside is capped by the sold calls. Some covered call ETFs mitigate this by writing calls on only a portion of the ETF’s holdings, with the remaining stocks being used to capture growth.”
CHPY, a dollar-denominated, Dublin-based ETF charging 0.99% a year, takes this strategy to another level by also buying another “long” call option on the same stock but with a higher strike price. The goal of this dual-option approach is to still earn income from the “short” call but to participate in gains if the stock passes the strike of the second option.
Not a credit
Confusingly, it calls this enhancement a “credit spread” covered call strategy, although it has nothing to do with debt or the gap between the yields on different bonds that this term implies.
Other YieldMax UCITS ETFs launched since last summer follow the same strategy and currently offer high annualised yields, although investors should note that this is based on their last monthly distribution and will vary.
YieldMax MSTRY Option Income (MSTY) currently boasts a 45.5% distribution rate from options written on US “micro-cap” stocks. Its Ultra Option Income Strategy ETC (ULTY) yields a distribution rate of 43.5% from calls on a portfolio of 15-30 US stocks. The YieldMax Future of Defence Option Income fund yielded 26% at the end of February from options written on Nato country defence stocks.
Our view
David Batchelor, senior analyst at QuotedData, said: “YieldMax Semiconductor Option Income UCITS ETF is a particularly interesting new active ETF launch that plays to two very current topics in the market. The first is the covered call element. This is the second such new launch we have covered this week, after JPMorgan Equity Premium Income, that is offering active exposure to an underlying asset, but exchanging some of the potential upside for an income stream and some lessening of the volatility. This covered call strategy is the most common way to use options in the active ETF market. The second interesting topic is that this is a thematic launch, which should prove significantly more actively managed, with very different returns to any benchmark, than the ‘index plus’ launches we see. Up to now such thematic funds have tended to remain small, so it will be interesting to see what happens here, particularly with HANetf providing the white label service.”
