YMAX: It Has A Place In Your Portfolio But Likely A Small Place (2024)

YieldMax Universe Fund of Option Income ETF (NYSEARCA:YMAX) is a recently launched and highly anticipated fund from YieldMax which is known for its single stock covered call ETFs such as TSLA Option Income Strategy (TSLY), NVDA Option Income Strategy (NVDY), AAPL Option Income Strategy (APLY) and so on. In fact, I've covered several of those ETFs in my past articles. Basically, YMAX is a fund of funds where it combines all existing YieldMax funds into one fund while adding 0.25% to these funds' expense ratio of 1.00% which takes it to 1.25%.

The fund currently holds all of existing 19 YieldMax ETFs and this number could change in the future as YieldMax creates more single-stock ETFs in the future. As you can see below, the fund uses equal-weighted strategy all funds are weighted equally, which can cause an issue for some investors who are not comfortable with this type of arrangement. Perhaps a better arrangement could be weighting by market cap of the underlying stocks where APLY and MSFO would get a higher weight within the ETF as opposed to much smaller funds like AIYY (AIYY) which writes covered calls on C3.ai, Inc. (AI) which is a small-cap company with a market cap of only $2.5 billion. I am not sure giving AIYY same weight as MSFO is a good idea when Microsoft's market cap is about 1,000 bigger.

Still, this is probably better than picking single stock ETFs which may or may not perform well. Many people aren't happy with the performance of some of YieldMax funds, particularly TSLY. The fund is down -62% in price and -15% in total returns since inception. The fund was launched and marketed as a super high yielder where its original yield was 63% which created a lot of buzz when it was originally launched. Since then, the fund didn't do well, but we can't blame it all on the fund since Tesla stock has been doing bad as well.

On the other side of the spectrum, we also have some YieldMax funds that performed quite nicely such as NVDY. While it launched only a year ago, the fund is up 34% in share price and up 119% in total returns. Most people who bought this fund last year are now enjoying outsized returns and their yield on original cost is now close to 100% if they have been reinvesting their dividends. Of course, this was helped greatly by Nvidia's (NVDA) outperformance.

At the end of the day, YieldMax funds all use the same methodology and if they are having drastically different results, it is not because one is better managed than the others. It's simply because that fund's underlying stock performed better than others. If we look at YieldMax funds that have been around since last year, we see that their performance has varied widely, ranging from -25% to +118% but more funds than not resulted in decent returns. Out of the 10 oldest single-stock based YieldMax funds, 7 out of them delivered at least 20% returns in the last year. Of course, this was helped greatly by the fact that tech stocks performed really well since last year so they probably wouldn't be performing this well in a year like 2022 when Nasdaq was down -35% at one point. Also keep in mind that most of these funds actually underperformed their underlying stocks but that was expected since covered calls give up upside potential in return of premiums.

Since YMAX is an equal-weight fund of all single-stock based YieldMax ETFs, its distribution yield will be roughly the average of all YieldMax ETFs. Last month, the average annualized distribution yield for YieldMax ETFs was 35%, and it's no surprise that YMAX also distributed that much. The future distributions of the fund will also depend on how much each fund distributes on average. Historically speaking, covered call funds tend to distribute more when volatility levels are higher and distribute less when volatility is low because they harvest volatility to generate income. Of course, volatility of individual stocks will range widely and change from month to month. While the overall index volatility (measured by VIX) will be around 10 to 20 range most of the time, volatility of individual stocks (especially tech stocks) can go as high as 30-40 in some months, generating juicy returns but also at a higher risk as we can see in TSLY.

Below are the volatility levels of some tech stocks that are covered by YieldMax ETFs. Notice two things. First, volatility levels range widely between them anywhere from 14% to 48%. Second, volatility level of the same stock also ranges widely from month to month. The same stock could have a 15% volatility one month and 35% volatility the next month. This is what drives premiums for covered call funds.

YMAX has only been around for a few months so it's too soon to talk about its performance, but so far, it's been outperforming both S&P 500 (SPY) and Nasdaq (QQQ) in total returns. The fund delivered 12.68% in total returns in its 3 months of existence whereas both indices returned around 8% during this time. Again, this is a very short term and probably not enough to tell us about performance.

YMAX also has a sister fund called YieldMax Magnificent 7 Fund of Option Income (YMAG). It's basically a magnificent 7 version of YMAX. Instead of holding all 19 YieldMax funds, it only holds the 7 funds that cover the magnificent seven (Apple, Microsoft, Tesla, Nvidia, Google, Meta and Amazon). This fund has a lower yield of around 25% versus the 35% yield you get from YMAX (which will vary from month to month) but it is seen as the less volatile and safer option by some investors. YMAG actually reminds me of another fund that I've covered in the past, which is REX FANG & Innovation Equity Premium Income ETF (FEPI). FEPI holds and writes covered calls on 15 or so big tech stocks and has a distribution yield of 25% which is comparable to what you'll likely get from YMAG.

There is one big difference between FEPI and YieldMax funds though. While both funds use active management, YieldMax funds are "more active" so to speak. YieldMax funds seem to adjust their positions on almost daily basis based on stock movements and they post their daily adjustments on their website. FEPI management is not as active. They will write covered calls a month out and wait until expiration to roll them to the next month. Which fund you like better depends on how comfortable you are with super active management. Sometimes super-active management can result in outsized returns but other times it can also result in poor performance especially emotions are involved.

So what's the verdict on YMAX? I think it is worth having in your portfolio as long as you know what you are getting yourself into and keep your position size small. Just be realistic and don't expect 35% total returns year after year just because that's the current distribution yield. One thing you could do is do a half-half approach where you buy a half position of YMAX and half position of QQQ (Nasdaq index fund) so that you partake in both upside as well as yield.

The biggest risk for YMAX is if technology stocks suddenly take a dive but this would also result in higher volatility and perhaps higher premium incomes for the fund so it all depends on how a deep drop in tech stocks would play out. If it happens in a slow and steady fashion like it happened in 2022, YMAX might be fine and even collect higher premiums but if it happened suddenly like 2020 and resulted in a quick V-shape recovery afterwards, the fund could lose a lot of money and not be able to capture the upside of the V recovery since it happened so fast. This is why it's important to keep your position size small and keep an eye on it without getting too greedy about that juicy distribution yield which looks very tempting to say the least.

A final word on taxation. This fund should be held in a tax-deferred account such as a 401k or IRA because distributions will be taxed as short-term income so they may be taxed heavily if you belong to a higher tax bracket.

I own separate portfolios for separate goals. I have one portfolio where I have nothing but income plays, another portfolio where I have nothing but growth stocks. I also have another portfolio where I run my options plays. I try not to mix different portfolios because they all have different goals and purposes. Sometimes one of my portfolios outperform other times other do. I am a big believer of diversification of not only assets but also methods and investment philosophies. Diversification is not simply buying 20 different stocks, it is applying different methods to different goals that fit to serve an investor's short term and long term targets.I am a "long only" investor and stay away from shorting companies. I will also do a lot of delta-neutral options plays where I will try to benefit from a stock or funds lack of movement. Also a huge fan of options plays and strategies including but not limited to covered calls, iron condors, butterflies, calendar spreads, call-put spreads. I've probably tried every options play there is, sometimes with success, sometimes with failure.At Seeking Alpha, I mostly analyze and write about stocks and funds that I own or I plan on owning. I rarely ever write about a stock or fund I at least don't have intention of owning some day.