risky investments - YMAX/YMAG

[steady saver]

I got a call from my brother in law yesterday and he was earnestly telling me about guys at work that are making hand over fist on both YMAX and YMAG. Huge returns he says and huge dividends. His buddies are making tons of money and are urging him to invest as well. I told him that if something sounds too good to be true, then it is. He agreed. I also told him I knew nothing about it but would check into it.

I looked these up and they're options income ETFs. Very high risk. I know next to nothing about options but I do know high risk when I see it. My BIL is wanting to retire in 4 years and won't have a huge cushion even at that. My advice to him will be to just pass it by. My secondary advice, if he just can't get it out of his system, would be that if he does choose to invest, to only choose a VERY small amount that he is fine with losing.

I guess my question is simply is anyone familiar with these ETFs and can you explain in simple terms how these options ETFs work? My dad lost money that he couldn't afford to lose in the sub-prime mortgage frenzy and I have a huge aversion to risky investments of any kind. Still I'd like to understand them.

 

[timbervest]

"making tons of money "

 

[aja8888]

Pure gambling. He should think about going to Vegas where he can have some fun losing money.

 

[sakowitzm]

I got a call from my brother in law yesterday and he was earnestly telling me about guys at work that are making hand over fist on both YMAX and YMAG. Huge returns he says and huge dividends. His buddies are making tons of money and are urging him to invest as well. I told him that if something sounds too good to be true, then it is. He agreed. I also told him I knew nothing about it but would check into it.

I looked these up and they're options income ETFs. Very high risk. I know next to nothing about options but I do know high risk when I see it. My BIL is wanting to retire in 4 years and won't have a huge cushion even at that. My advice to him will be to just pass it by. My secondary advice, if he just can't get it out of his system, would be that if he does choose to invest, to only choose a VERY small amount that he is fine with losing.

I guess my question is simply is anyone familiar with these ETFs and can you explain in simple terms how these options ETFs work? My dad lost money that he couldn't afford to lose in the sub-prime mortgage frenzy and I have a huge aversion to risky investments of any kind. Still I'd like to understand them.

I am becoming familiar with another from that family of ETFs - YBIT, based on BitCoin (but actually BITO.) I've been tracking # shares outstanding and the Treasuries and option positions they've held for about three weeks now. No conclusions yet except this - I'm not sure how they make money to pay the dividends. Here are some interim "discoveries".... 1) The options are NOT making money. Most of the positions have closed out of the money, though that's a bit unfair, as I don't know the purchase price. 2) Usually the options are just out of the money, extremely short-term (like current week or following week) spreads. A typical YBIT spread might be they buy the $19.50 strike price and sell the $21.00 strike price. 3) 95% of the funds they hold are invested in Treasuries - short, medium, and somewhat longer term (one year or so). I have a theory that the dividends are being paid by selling off some of the Treasuries, though I haven't been following long enough to test that. 4) The number of shares outstanding fluctuates wildly. When I first looked at YBIT there were something like 4,050,000 shares outstanding. In the following three weeks or so, that has gone as high as a bit over 5M shares and come back down to today's 4,250,000 shares. No idea how or why those figures increase and/or decrease. 5) I cannot rule out that this is a Ponzi scheme. You can't just lose money on the options and sell off Treasuries to pay the dividend FOREVER. That won't work. Perhaps the fluctuation in number of shares outstanding could shed light on this, but I haven't a clue how or why that happens.

I go here:

YBIT, Bitcoin Option Income ETF – YieldMax ETFs

www.yieldmaxetfs.com

for information tracking. I'm sure there is an analogous website for the two you mentioned. Be aware though - they list current positions but it's not always complete. You would need to click on the download button to download the current positions, and sometimes there will be more positions in the download than show up on the website.

If you're able to discern more about this family of ETFs, I hope you'll share what you learn.
Oh - for those not familiar with this family, YBIT is paying out close to 80% in dividends!!! Oh, and another possible interesting fact. Many of these have only been around six months or so - in my case, YBIT was established in April. So they certainly have not been tested over significant market movements, interest rate movements, or especially BitCoin movements.

 

[sakowitzm]

"making tons of money "

View attachment 52762

True, but... If you bought at the beginning which looks to be January 17, your shares have dropped $2.32 per share. But you have received $5.50 per share in dividends. So your gain of $3.18/share is 16% over 10 months. THAT'S not too shabby. Can they continue this See my reply about YBIT. I'm not convinced.

 

[steady saver]

Thank you all so far on your quick responses. To clarify, the "hand over fist" income they've earned is apparently on crazy dividends of somewhere in the neighborhood of 50-75%. This stuff makes me crazy. I told him if that was the case, everyone would be buying it.

 

[OldShooter]

William Bernstein: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

 

[steady saver]

I explained to him that there is "gaming" and that there is investing and that this was gaming. Okay, if he's willing to lose it all. I just heard back from him and he is not buying. I sent him firecalc and told him I'd be happy to walk through it with him without having to know his numbers. He doesn't have a clear number in mind of his expenses and I told him he can't plan anything clearly until he is clear on that.

 

[timbervest]

True, but... If you bought at the beginning which looks to be January 17, your shares have dropped $2.32 per share. But you have received $5.50 per share in dividends. So your gain of $3.18/share is 16% over 10 months. THAT'S not too shabby. Can they continue this See my reply about YBIT. I'm not convinced.

You're right. My experience however is that a 61% Distribution Rate is rarely sustainable. This may be an anecdotal return experience. YMMV.

 

[steady saver]

To clarify, he is not buying into the ETF, not "not buying" my explanation.

 

[sakowitzm]

You're right. My experience however is that a 61% Distribution Rate is rarely sustainable. This may be an anecdotal return experience. YMMV.

Exactly this. I can (yet) figure out where the $$$$ are coming from to pay the dividends, other than selling off Treasuries, which certainly is not sustainable over a long period of time. If, during the period of time, the underlying equity goes bonkers, then it could actually be a big win. Well, a win. Since they're engaged in (synthetic) covered calls. And important to note that this particular family of ETFs has only been around maybe less than one year. Far too early to call fish or foul.

 

[Qs Laptop]

True, but... If you bought at the beginning which looks to be January 17, your shares have dropped $2.32 per share. But you have received $5.50 per share in dividends. So your gain of $3.18/share is 16% over 10 months. THAT'S not too shabby. Can they continue this See my reply about YBIT. I'm not convinced.

Exactly. This is the saving grace of YMAX (and some others like it.) Think of it as a hedge against volatility and not necessarily as a growth equity. You have to look at each individual example.

Take a look at YMAG. Back in January you could have gotten into YMAG fund for $20.00. It's now at $18.76. That is a YTD loss of -6.84. However, it's returned dividends of $5.22. That is a dividend gain of 26.1%. Your net gain is (roughly) 26.1 - 6.84 = 19.26%. Sounds pretty good.

HOWEVER, the top holdings in YMAG are options on the "magnificent 7" or Nvidia, Apple, Meta, Amazon, Google, etc. Had one simply bought QQQ or FBGRX, which are an ETF and a mutual fund that has the magnificent 7 as their top holdings, you would be up 38.7% and 45.1% respectively. You'd be up about 2X the net return from YMAG.

This is yet another example of people's fascination with dividends rather than total return. These sorts of people hold JNJ, VZ, ATT, etc. because they pay a great dividend. Meanwhile, with these "great dividend" stocks they are getting about 1% to 5% annual growth in the stock price, if they're lucky. They'd be much better off with an index fund.

I would add that the dividend income from YMAG and YMAX is considered regular income, and taxed as such, whereas if you hold QQQ or FBGRX for a year or more and sell some shares you will incur a long term capital gains tax which is likely less than the tax on regular income. Assuming these are held in a taxable account.

Finally, if you hold one of these Yieldmax option income investment vehicles and the underlying stock is volatile they can make some sense. For example, I own Tesla stock, but I also own TSLY, a Yieldmax option income device that currently pays a 77% annualized dividend. So while my Tesla stock has been all over the map this year (it's up 2% YTD), I get steady monthly dividends from TSLY (which is down 52%).