Latest news with #coveredcalls
Yahoo
3 days ago
- Business
- Yahoo
High Dividend Yield and Monthly Payouts? This ETF Offers Both.
Selling covered calls is becoming an increasingly common income-producing strategy. This approach, however, comes with notable downsides and uncertainties. For some, the JPMorgan ETF's monthly dividends and strong yield may be worth it. 10 stocks we like better than JPMorgan Equity Premium Income ETF › There's no such thing as a perfect investment -- each one is ultimately a trade-off. Higher-growth stocks are usually riskier, for instance, while income-producing holdings often don't produce a great deal of capital appreciation. For investors who want (or need) monthly investment income to help cover their living expenses, however, the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI) is an intriguing prospect. Not only does its trailing yield stand at an impressive 8.6%, but it holds stocks that at least offer some potential upside. The question is, is it the right choice for you? For the record, you can find higher yields from monthly dividend ETFs. The Global X SuperDividend ETF's current yield is an incredible 9.9%, for instance, while the Invesco KBW High Dividend Yield Financial ETF boasts a dividend yield of 12.5%. But there is a trade-off. Global X's fund owns a whole lot of smaller foreign stocks that can perform unpredictably, and often badly. This ETF has dramatically underperformed the S&P 500 since the fund's inception back in 2011, and its dividend payments made in the meantime haven't made up the difference at any point during that stretch. The Invesco fund has fared better, but is still not a straight-up investment in the broad market. Its heavy exposure to real estate investment trusts (REITs) and similar asset management investments has limited its upside, largely due to the economic environment. So how is the JPMorgan Equity Premium Income ETF different, and better? First and foremost, it holds the same stocks as the aforementioned S&P 500 (although the size of these holdings tends to be a bit better balanced than the top-heavy S&P 500). There's a significant twist to this idea, though. This ETF's managers are constantly selling call options against the fund's stock holdings, generating recurring income as a result. This income is then used to pay ETF's monthly dividend. Great, you say, but what's a call option? Keep reading. In simplest terms, a call option is a bullish bet that a stock (or index) will rise to or above a particular price before or by a specific date. Qualified traders and institutions can pay to make such a wager, but they must pay a counterparty to make what's essentially the opposite bet -- a bet that the stock or index in question won't reach that price level by the specified date. Indeed, this betting is so well organized that these options trade on exchanges and are dynamically priced all throughout the day just like stocks. That's what JPMorgan is doing with JEPI. It's collecting money for being willing to take, or "sell," the other side of bullish bets someone else is making by buying call options, using its own underlying stock holdings as collateral. It's called a "covered call" strategy, in fact. JPMorgan is "covered" if it needs to sell or deliver a stock per the call option's requirements. Sounds complicated, and even a little risky? It can be. As was noted, if the other party is right about the stock in question rising in value, JPMorgan might be required to sell shares of one of more of its S&P 500 stocks the fund is holding. That's not what it wants in the long run, though. The fund's managers would rather keep all of its stock holdings all the time. The thing is, JPMorgan might still be making that sale at a profit. It also still keeps any money collected for selling the covered call in the first place even if it's forced to fork over those shares. That's far from being disastrous. The best-case scenario, of course, is that the call option in question expires without its buyer ever deciding to use (or "exercise") the option. This takes JPMorgan's risk off the table, freeing it up to make another similar bet, and then another, and then another, in perpetuity. This is why selling covered calls can be a savvy way of consistently monetizing what are ultimately long-term investments. But there's a catch. More than one, actually. As was noted above, every investment imposes a trade-off. JEPI is no exception. Perhaps the chief trade-off of using covered calls to generate continual income is that -- even on a net basis -- it underperforms its most relevant benchmark index. As the graphic below plainly shows, even adding in its dividend payments funded by the sale of covered calls, the JPMorgan Equity Premium Income ETF has trailed the overall return of the S&P 500 since the fund launched back in the middle of 2020. Blame it on the covered call strategy itself. The market has a knack for preventing anyone -- even brilliant traders -- from gaining and keeping a market-beating edge for too long. Indeed, it often punishes the effort with a subpar performance. The other trade-off? Although the trailing dividend yield of 8.6% is compelling, the underlying dividend isn't exactly consistent. The early July payment of just over $0.40 per share is much lower than June's per-share payment of $0.54, for instance. Early this year, the monthly payment fell to just a little over $0.32. If you need this income to pay your bills, owning this fund to do it could prove stressful. In this instance, blame it on the way call (and put) options are priced. Their values are impacted by unpredictable factors ranging from market volatility to interest rates to the direction the market itself is thought to be moving. As such, sellers of these options may not always get a great price. So JEPI is a no-go as a monthly dividend investment? Well, that's not necessarily the case at all. Despite its downsides, the strong yield of 8.6% here is still attractive even if it changes from time to time. You'd probably just want to buffer its payment inconsistencies by holding other, more consistent income investments even if they offer smaller yields. There's also at least some potential for capital appreciation with this ETF's strategy. You won't achieve as much as you might with a stake in the SPDR S&P 500 ETF Trust. But you also wouldn't be collecting the sort of dividends with the S&P 500 ETF that you would with the JPMorgan Equity Premium Income ETF, and you'd certainly see more long-term gains with this fund then you would with interest-bearing bonds. Again, trade-offs. Bottom line? As is always the case, don't weigh potential ownership of this exchange-traded fund in a vacuum. Think about your particular needs and risk tolerances, and determine how it might fit in with the rest of your holdings. You may actually find a place for JEPI in your portfolio. The Motley Fool's expert analyst team, drawing on years of investing experience and deep analysis of thousands of stocks, leverages our proprietary Moneyball AI investing database to uncover top opportunities. They've just revealed their to buy now — did JPMorgan Equity Premium Income ETF make the list? When our Stock Advisor analyst team has a stock recommendation, it can pay to listen. After all, Stock Advisor's total average return is up 1,060% vs. just 179% for the S&P — that is beating the market by 881.02%!* Imagine if you were a Stock Advisor member when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $679,653!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,046,308!* The 10 stocks that made the cut could produce monster returns in the coming years. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of July 15, 2025 James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. High Dividend Yield and Monthly Payouts? This ETF Offers Both. was originally published by The Motley Fool
Forbes
6 days ago
- Business
- Forbes
Wall Street's Deepest Values: 5 Cheap CEFs Yielding 7%+
Travel Destination The last bargains on the big board? Discounted closed-end funds (CEFs). CEFs are often the 'last stop' for dividend deals. We are talking about an inefficient corner of the income universe, which is just great for us contrarians—we love the discounts. And these funds can trade for less than 'fair value' for months and even years on end. When the markets washed out in April, these CEFs were discarded by their vanilla dividend owners. Let's pick up the pieces for up to 12% off, or 88 cents on the dollar. And in the process secure yields up to 9.7%. Nuveen Dow 30 Dynamic Overwrite Fund (DIAX)Distribution Rate: 8.4% We'll start with the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX), an example of a strategy that thrives in CEF land: covered calls. DIAX's five fund managers attempt to replicate the performance of the Dow Jones Industrial Average, but with less volatility, by owning the DJIA's components while also selling call options on between 35% and 75% of the notional value of the equity portfolio. Covered-call funds generally offer the exact same tradeoff: Receive lower volatility and a higher percentage of returns coming from distributions in exchange for lesser overall performance than the underlying index (because DIAX's holdings are being 'called away' as they rise). Unfortunately, in the case of DIAX, the underperformance is stark, even when considering a distribution rate that's more than 5x the Dow's dividend yield. We're generally better off buying funds like DIAX when we think the Dow is toppy. The fund trades at an 11% discount as I write, more than its recent average of 9%. Neuberger Berman Next Generation Connectivity Fund (NBXG)Distribution Rate: 8.3% Numerous CEFs turn income-unfriendly segments of the market into distribution funnels. Take the Neuberger Berman Next Generation Connectivity Fund (NBXG), which generates an 8%-plus monthly payout from a few dozen technology, communications, and consumer stocks. While thematic ETFs are a dime a dozen, thematic CEFs like NBXG are few and far between. This Neuberger fund's theme is next-generation connectivity; managers Hari Ramanan, Yan Taw Boon, and Timothy Creedom seek out stocks that 'demonstrate significant growth potential from the development, advancement, use or sale of products, processes or services related to the fifth generation mobile network and future generations of mobile network connectivity and technology.' But if we take a quick look, it's pretty apparent NBXG can also stand in as a play on artificial intelligence (AI). Mag 7 holdings such as Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL) and Nvidia (NVDA) are pretty direct plays on AI at this point. The fund even invests in private companies, such as AI-powered Grammarly. It also engages in options trading to generate gains from options premiums and tamp down on risk. Neuberger's CEF has trailed the tech sector since inception, though that's not a terribly fair comparison given its exposure to other sectors. Still, this strategy has shown a lot of promise over the past 18 months or so: The fund's discount to NAV is generous, at 11.2% currently, so we have NBXG's assets selling for 89 cents on the dollar..) Royce Micro-Cap Trust (RMT)Distribution Rate: 7.5% Another place we might not expect a high-single-digit yield? Small-cap stocks. But that's exactly what we get from Royce Micro-Cap Trust (RMT). RMT—managed by Jim Stoeffel and Andrew Palen—is a micro-cap value fund in name, though given an average market cap of about $750 million, it's truly closer to small-cap in nature. Still, not exactly a who's who of ballyhooed dividend names. Holdings include the likes of electronic component maker Bel Fuse (BELFA), which pays a fractional yield, and online advertising firm Magnite (MGNI), which pays no dividend whatsoever. So, what's with the big distribution? RMT doesn't really trade options, nor does it use debt leverage. Instead, it's just a quarterly distribution of predominantly long-term capital gains. Not ideal, but RMT pulls it off. I've previously pointed out that RMT always trades at a discount, and indeed, it's trading right around its five-year average discount to NAV (12%). That's not exactly a good thing—ideally, management should have a plan to close that discount at some point. But it's hard to knock Royce too much given RMT's consistent outperformance. Virtus Total Return Fund (ZTR)Distribution Rate: 9.7% Virtus Total Return Fund (ZTR) is a 'portfolio in a can,' capable of investing in stocks and a wide array of bonds and other fixed income, both domestically and internationally. ZTR's four-manager team has currently built a 75/25 stock/bond portfolio. The equity sleeve is both lopsided and defensive in nature; half of its weight is in utilities, while the rest is largely taken up by industrials and energy firms. On the debt side, ZTR owns investment-grade and junk corporates, emerging-market bonds, asset-backed securities, mortgage-backed securities, bank loans, Treasuries, and more. Like many closed-end funds (but unlike the CEFs above), ZTR amplifies its bets through debt; it currently has 130% of assets invested thanks to debt leverage. Virtus Total Return is considered a 'moderate allocation' fund, which refers to funds that typically have between 50% and 70% of their assets invested in stocks (with the rest in bonds and/or cash). While this CEF currently has a 75/25 blend, I've seen it as low as 60/40 when looking at it in the past. Still, for comparison's sake, it's worth looking at ZTR against a couple different allocation benchmarks—in this case, a 60/40 ETF and a more aggressive 80/20 ETF. Virtus' fund has enjoyed pockets of outperformance in the past, but the fund has lost an enormous amount of ground recently. Its dips have been harsher than the plain-vanilla ETFs, which is normal for a leveraged CEF, but its recoveries have been more muted—the opposite of what we'd expect. Unfortunately, that blunts the appeal of ZTR's nearly 10% distribution (paid monthly), as well as a roughly 11% discount to NAV that's cheaper than its five-year average (8%). Calamos Global Dynamic Income Fund (CHW)Distribution Rate: 8.4% Calamos Global Dynamic Income Fund (CHW) is a global fund that can invest not just in common stock, but investment-grade corporates, junk corporates, preferred stock, bank loans, convertible debt, asset-backed securities, US government securities, options, and more. At the moment, about two-thirds of assets are invested in common stock, with another 15% in convertibles, 10% in corporate debt, and the rest scattered around the other categories. Geographically speaking, the US accounts for a little more than half of the fund's assets, with the rest in developed markets like Germany, Japan, and Canada, as well as emerging markets like China and India. On top of all of that, CHW's five-manager team also utilizes a hefty amount of debt leverage: just south of 30% currently. There aren't many global allocation funds out there, and those that are simply aren't built the way CHW is—especially given that management has a long leash and a lot of assets they can explore. But comparisons against the SPDR SSGA Global Allocation ETF (GAL)—an ETF in the same category (global moderate allocation)—are favorable, albeit bumpier. CHW is also trading at a tasty 10.7% discount to NAV that's more than twice as deep as its five-year average, and it's doling out an 8%+ distribution, paid monthly. Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever. Disclosure: none
Globe and Mail
04-07-2025
- Business
- Globe and Mail
SMCY Is an Income Hack on Supermicro
Key Points Option-writing and selling covered calls is a low-risk way of cash-monetizing existing positions in individual stocks. The strategy, however, comes with downsides, like limiting your net-upside potential. Cash-hungry growth investors looking for new picks for a tax-deferring retirement account may want to consider this ETF despite its relatively high expense ratio. Are you an income-seeking investor who also wants -- or needs -- growth? That's a bit of a pickle. After all, the more you have of one, the less you typically have of the other. There are some picks that let you have your proverbial cake and eat it too, however. While they're not a great fit for everyone's portfolio, option-writing-focused exchange-traded funds (ETFs) can provide ongoing dividend income in addition to offering you most of the benefits of owning stocks. There's even a handful of single-stock-focused option-writing ETFs. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » One of these ETFs worth a closer look right now is the YieldMax SMCI Option Income Strategy ETF (NYSEMKT: SMCY), which turns something like a position in Super Micro Computer (NASDAQ: SMCI) into an income-generating holding. Here's the deal. What the heck is option writing? Don't sweat it if you're not familiar with options; plenty of veteran investors aren't. The kinds of stock options that are bought and sold via an exchange just aren't something most people need to bother delving into. Still, there's nothing wrong with understanding them. You absolutely should understand options if you're going to consider any such income-producing exchange-traded funds -- even if you're never going to directly trade options for yourself. In the most basic sense, an option is a bet that a particular stock or index will make a particular move within a predetermined period of time. Call options are bullish bets. Put options are bearish bets. Like any other bet, you pay to make these wagers. Options are also legitimate securities, though, not only trading as such but priced in the familiar bid/ask auction format that allows their price to constantly change. A call option gains in value when the price of the underlying stock or index does, while a put option gains value when the underlying stock or index falls. Conversely, call options lose value when the stock or index in question falls, while put options lose ground when the index or stock at its basis gains in value. Here's the fun part for income-seeking investors: You don't just have to buy options and then hope to sell them for a profit in the future. You can sell options first, pocket the proceeds, and then aim to cover these trades in the future by buying them back at a lower price. Or, better still, just let those options expire altogether, essentially exiting the trade at no cost. That's option writing. There's risk, of course. The chief risk is just that you're forced to buy (or "cover") these option trades at a price above your initial sale price, locking in losses. Or, in the case of the covered call strategy that YieldMax is using with its ETFs, you could be forced to hand over shares of the underlying stock that are essentially serving as collateral for your option trade. In most cases, you'd be doing so while the stock in question is rallying, meaning you're missing out on much of that ticker's upside. This is why option selling can be such a tricky business. (If you still don't fully understand the idea, it might be worth rereading the section you just completed before proceeding to the next one.) How the YieldMax SMCI Option Income Strategy ETF works Enter the YieldMax SMCI Option Income Strategy ETF. Just as the name implies, the fund managers of the YieldMax SMCI Option Income Strategy ETF regularly sell call options against shares of Super Micro Computer that the fund already holds. This generates ongoing income, most of which is distributed to the fund's owners each and every month. However, in that the fund also owns a bunch of Super Micro Computer shares, holding this fund is somewhat akin to holding a stake in the stock itself. That's why the two investments generally move in the same direction, even if they don't move to the same degree. It usually works well enough. Although SMCY's net asset value (or market price) has unsurprisingly trailed the performance of SMCI since the fund launched in September of last year, it's also dished out $20.20 worth of per-share dividends -- or distributions -- during this time. That's about twice the ETF's current market price, almost keeping its total net return even with Super Micro Computer shares' performance during this stretch. It just delivered about half of this performance in the form of dividend income instead of capital gains. Indeed, SMCY's trailing-12-month dividend yield stands at just over 100%. Data by YCharts Just think it through, keeping the risks and downside in mind It seems almost too good to be true. You're getting the bulk of the net benefit of owning a great growth stock, but you're getting a big chunk of this benefit in the form of cash. In many ways, it is a great alternative to outright owning a stake in SMCI -- particularly for investors who like to constantly accumulate cash to fund new growth investments. There are downsides and risks worth considering, though. Chief among these risks is the underlying strategy of selling or writing options itself. Although the ETF's managers do a great job of balancing the inherent risk and reward of options trading, there are some risks that simply can't be managed away. In this case, the big risk is just that SMCI shares unexpectedly soar, and the fund is forced to hand over shares of Super Micro Computer in the midst of a rally. That, or the fund is forced to cover what are essentially "short" option trades by exiting these positions at a loss. Again, the call options that YieldMax is selling gain in value when SMCI rises, but that works against the strategy at work here. SMCY's managers want the value of the options they've already sold to lose ground. Sooner or later, it will happen. Even if it only happens occasionally, it can hurt the value of the fund in a hurry. The other downside is just the cost of managing such a fund. Unlike enormous index funds like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, the YieldMax SMCI Option Income Strategy ETF's annual expense ratio -- or management fee -- is hefty, at nearly 1%. Despite what many fund companies will argue, that does take a direct toll on net performance. Also, bear in mind that income-generating funds like this one tend to create a pretty big tax liability every year. Distributions are essentially dividends, after all. Still, there are some scenarios where an exchange-traded fund like this one makes sense for certain investors. Growth investors who would like some of their gains in the form of ongoing income, for instance, may be interested. That's particularly true if the position is going to be held within a tax-deferring retirement account. The key, of course, is just figuring out whether or not the underlying stock in question is worth owning in the first place. If you don't actually want to buy and hold Super Micro Computer, the income aspect of YieldMax SMCI Option Income Strategy ETF alone doesn't make it more attractive enough to matter. Fellow contributor Brett Schafer's got something to say about that. Should you invest $1,000 in Tidal Trust II - YieldMax Smci Option Income Strategy ETF right now? Before you buy stock in Tidal Trust II - YieldMax Smci Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Tidal Trust II - YieldMax Smci Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor 's total average return is1,060% — a market-crushing outperformance compared to180%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of June 30, 2025
Yahoo
04-07-2025
- Business
- Yahoo
AIYY Is an Income ETF Monster
AIYY pays a distribution yield of more than 100%. But it's mainly returning its investors' cash through those distributions. It's tethered to which has been highly volatile over the past year. 10 stocks we like better than Tidal Trust II - YieldMax Ai Option Income Strategy ETF › Over the past three years, Tidal Financial Group released several high-yield exchange-traded funds (ETFs) with jaw-dropping yields. One of the highest-yielding ones was the YieldMax AI Option Income Strategy ETF (NYSEMKT: AIYY), which was launched in November 2023 and currently pays a distribution rate of 100.8%. Many might scoff at any income investment that pays a monstrous 100% yield, but is it really a high-yield trap? To understand how an ETF like the YieldMax fund works, we should discuss covered call options. In a covered call, you sell a call on a stock you own by choosing an option with a strike price that's higher than the current share price and an expiration date in the future. The buyer pays you a premium for the call, and the value of that option varies according to the stock's volatility and its proximity to the expiration date. If that stock is still trading below the covered call's strike price at its expiration date, you'll keep your shares and the premium, and the buyer will leave empty-handed. But if the stock has climbed above the strike price, you'll keep the premium but end up selling your shares at that strike price. Many investors write covered calls on their own stocks to generate passive income. That strategy works well when the market trades sideways, but it can backfire during big rallies. To offer investors an alternative to handling the covered call strategy manually, Tidal launched covered-call ETFs, which are pinned to volatile stocks that pay out high premiums that support its distributions. The YieldMax fund mainly sells short-term calls (with strike prices 5% to 15% higher than the current stock price) each month to boost its distributions, while parking some of its excess cash in short-term Treasuries to earn interest. This particular ETF's underlying stock is (NYSE: AI), the divisive enterprise artificial-intelligence AI software maker that still trades more than 40% below its initial public offering (IPO) price. But unlike a regular investor, who writes covered calls to generate passive income, the ETF doesn't actually own any shares of Instead, the fund writes covered calls on a "synthetic" long position comprised of longer-dated call and put options instead of owning the stock. That approach requires less capital, since it doesn't need to buy 100 shares of for each covered call. If shares decline, the ETF's synthetic position is designed to match those declines. However, that requires perfect hedging, which can be challenging. Long-dated options used in synthetic positions also decay over time, and the fund needs to keep rolling those positions forward to keep up with shares. trades far below its IPO price, but its revenue growth accelerated again in fiscal 2024 and fiscal 2025 (which ended this April). And it recently extended its crucial deal with Baker Hughes, which accounts for over 30% of its revenue, for another three years. Those catalysts -- along with its fresh federal contracts, cloud partnerships, and generative AI tools -- could drive the stock higher over the next few years. But even if that happens, the YieldMax ETF will underperform stock as its covered call strategy limits its gains. Ideally, it can narrow that gap with its big distributions -- but the messy way it uses synthetic long positions could cause it to lag behind stock. To make matters worse, investors need to pay an annual expense ratio of 1.67% to execute the fund's convoluted strategy, which is much more expensive and confusing than simply buying shares and manually writing covered calls. That's a big part of why the ETF's shares declined 64% over the past 12 months as stock only fell 14%. Even if you had reinvested the fund's big distributions, you would have still ended up with a negative total return of 24%. Lastly, most of the ETF's distributions are a return of capital (ROC), which means it's mainly returning its investors' cash instead of generating any fresh income. That strategy is constantly eroding its net asset value (NAV) -- which has already dropped 64% over the past 12 months -- and will further limit its upside potential. That's why that 100.8% distribution yield doesn't mean you'll magically double your investment by buying its shares and waiting for the next distributions. That ratio simply means that if its most recent monthly distribution were paid out every month for a year, its total annualized payout would be equivalent to 100.8% of the ETF's current price. But that ratio looks backward instead of forward, and its monthly payouts could decline sharply if volatility declines or its stock crashes. The YieldMax AI Option Income Strategy ETF might seem like an income-generating monster, but it's a dangerous investment. You're mainly getting back your own money, you're being charged for it, and the ETF will still underperform stock if it rallies -- yet experience steeper declines if it pulls back. Investors should avoid it and stick with more-reliable dividend stocks instead. Before you buy stock in Tidal Trust II - YieldMax Ai Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Tidal Trust II - YieldMax Ai Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends The Motley Fool has a disclosure policy. AIYY Is an Income ETF Monster was originally published by The Motley Fool
Yahoo
04-07-2025
- Business
- Yahoo
SMCY Is an Income Hack on Supermicro
Option-writing and selling covered calls is a low-risk way of cash-monetizing existing positions in individual stocks. The strategy, however, comes with downsides, like limiting your net-upside potential. Cash-hungry growth investors looking for new picks for a tax-deferring retirement account may want to consider this ETF despite its relatively high expense ratio. 10 stocks we like better than Tidal Trust II - YieldMax Smci Option Income Strategy ETF › Are you an income-seeking investor who also wants -- or needs -- growth? That's a bit of a pickle. After all, the more you have of one, the less you typically have of the other. There are some picks that let you have your proverbial cake and eat it too, however. While they're not a great fit for everyone's portfolio, option-writing-focused exchange-traded funds (ETFs) can provide ongoing dividend income in addition to offering you most of the benefits of owning stocks. There's even a handful of single-stock-focused option-writing ETFs. One of these ETFs worth a closer look right now is the YieldMax SMCI Option Income Strategy ETF (NYSEMKT: SMCY), which turns something like a position in Super Micro Computer (NASDAQ: SMCI) into an income-generating holding. Here's the deal. Don't sweat it if you're not familiar with options; plenty of veteran investors aren't. The kinds of stock options that are bought and sold via an exchange just aren't something most people need to bother delving into. Still, there's nothing wrong with understanding them. You absolutely should understand options if you're going to consider any such income-producing exchange-traded funds -- even if you're never going to directly trade options for yourself. In the most basic sense, an option is a bet that a particular stock or index will make a particular move within a predetermined period of time. Call options are bullish bets. Put options are bearish bets. Like any other bet, you pay to make these wagers. Options are also legitimate securities, though, not only trading as such but priced in the familiar bid/ask auction format that allows their price to constantly change. A call option gains in value when the price of the underlying stock or index does, while a put option gains value when the underlying stock or index falls. Conversely, call options lose value when the stock or index in question falls, while put options lose ground when the index or stock at its basis gains in value. Here's the fun part for income-seeking investors: You don't just have to buy options and then hope to sell them for a profit in the future. You can sell options first, pocket the proceeds, and then aim to cover these trades in the future by buying them back at a lower price. Or, better still, just let those options expire altogether, essentially exiting the trade at no cost. That's option writing. There's risk, of course. The chief risk is just that you're forced to buy (or "cover") these option trades at a price above your initial sale price, locking in losses. Or, in the case of the covered call strategy that YieldMax is using with its ETFs, you could be forced to hand over shares of the underlying stock that are essentially serving as collateral for your option trade. In most cases, you'd be doing so while the stock in question is rallying, meaning you're missing out on much of that ticker's upside. This is why option selling can be such a tricky business. (If you still don't fully understand the idea, it might be worth rereading the section you just completed before proceeding to the next one.) Enter the YieldMax SMCI Option Income Strategy ETF. Just as the name implies, the fund managers of the YieldMax SMCI Option Income Strategy ETF regularly sell call options against shares of Super Micro Computer that the fund already holds. This generates ongoing income, most of which is distributed to the fund's owners each and every month. However, in that the fund also owns a bunch of Super Micro Computer shares, holding this fund is somewhat akin to holding a stake in the stock itself. That's why the two investments generally move in the same direction, even if they don't move to the same degree. It usually works well enough. Although SMCY's net asset value (or market price) has unsurprisingly trailed the performance of SMCI since the fund launched in September of last year, it's also dished out $20.20 worth of per-share dividends -- or distributions -- during this time. That's about twice the ETF's current market price, almost keeping its total net return even with Super Micro Computer shares' performance during this stretch. It just delivered about half of this performance in the form of dividend income instead of capital gains. Indeed, SMCY's trailing-12-month dividend yield stands at just over 100%. It seems almost too good to be true. You're getting the bulk of the net benefit of owning a great growth stock, but you're getting a big chunk of this benefit in the form of cash. In many ways, it is a great alternative to outright owning a stake in SMCI -- particularly for investors who like to constantly accumulate cash to fund new growth investments. There are downsides and risks worth considering, though. Chief among these risks is the underlying strategy of selling or writing options itself. Although the ETF's managers do a great job of balancing the inherent risk and reward of options trading, there are some risks that simply can't be managed away. In this case, the big risk is just that SMCI shares unexpectedly soar, and the fund is forced to hand over shares of Super Micro Computer in the midst of a rally. That, or the fund is forced to cover what are essentially "short" option trades by exiting these positions at a loss. Again, the call options that YieldMax is selling gain in value when SMCI rises, but that works against the strategy at work here. SMCY's managers want the value of the options they've already sold to lose ground. Sooner or later, it will happen. Even if it only happens occasionally, it can hurt the value of the fund in a hurry. The other downside is just the cost of managing such a fund. Unlike enormous index funds like the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, the YieldMax SMCI Option Income Strategy ETF's annual expense ratio -- or management fee -- is hefty, at nearly 1%. Despite what many fund companies will argue, that does take a direct toll on net performance. Also, bear in mind that income-generating funds like this one tend to create a pretty big tax liability every year. Distributions are essentially dividends, after all. Still, there are some scenarios where an exchange-traded fund like this one makes sense for certain investors. Growth investors who would like some of their gains in the form of ongoing income, for instance, may be interested. That's particularly true if the position is going to be held within a tax-deferring retirement account. The key, of course, is just figuring out whether or not the underlying stock in question is worth owning in the first place. If you don't actually want to buy and hold Super Micro Computer, the income aspect of YieldMax SMCI Option Income Strategy ETF alone doesn't make it more attractive enough to matter. Fellow contributor Brett Schafer's got something to say about that. Before you buy stock in Tidal Trust II - YieldMax Smci Option Income Strategy ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Tidal Trust II - YieldMax Smci Option Income Strategy ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy. SMCY Is an Income Hack on Supermicro was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
