If Wall Street’s Love Affair With Nvidia Ends, This ETF Could Be Toast

When the first thing that an exchange-traded fund (ETF) places on its website is a list of warnings, well, you should probably pay attention. And a list of warnings is exactly what you’ll find at the top left of the Yieldmax NVDA Option Income Strategy ETF (NVDY 0.74%) product-information page. Unfortunately, what appears to the right side will likely get much more attention — a distribution yield of 77%! That’s not a typo. There’s a lot to think about, however, before you buy this ETF.

What warning is the Yieldmax NVDA giving to investors?

When dealing with risky investments, the Securities and Exchange Commission (SEC) usually makes a product sponsor spell out the risks so investors can clearly understand what they are getting into. Normally, however, those risks aren’t placed front and center, and often get buried in a prospectus. The Yieldmax NVDA ETF has taken a radically different approach. Right at the top of its production-information website, it explains:

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.

Shareholders of the Fund are not entitled to any dividends paid by NVDA.

That’s some list! You really need to understand what’s going on before you get lured into the ETF by the 77% distribution yield. That yield, by the way, is listed in large font right across from the risks (in dramatically smaller font), which may lead some to overlook the really important information. You guessed it: the important information is not the yield, it’s the risk.

Basically, the sponsor is telling you that the Yieldmax NVDA security is shockingly risky. That’s partly because it is only tracking one stock. But then it adds on an option strategy, which increases complexity. And, further down on the page, you’ll find that you are paying an expense ratio of 0.99% for the privilege of taking on all of that risk. That’s a very high expense ratio for an ETF.

Thinking a bit more about this ETF

So what’s really going on here? The ETF owns a bunch of bonds and then buys and sells options tied to shares of Nvidia (NVDA 1.92%). The goal of the fund is to generate current income, with a secondary objective of seeking “exposure to the share price of the common stock of NVIDIA Corporation (NVIDIA), subject to a limit on potential investment gains.”

Basically, since the ETF doesn’t own any Nvidia stock, it is dealing in naked options (which just means it doesn’t own any of the underlying stock). Selling naked call options (which give the buyer of the call option the right to buy the shares and obligates the seller of the option to deliver/sell them) can generate income, for sure, but the risk is that the stock rises and the option has to be bought back at a higher price because it is likely to be exercised. To deal with that risk, the ETF buys call options that have a higher price associated with them (and usually a lower cost). Essentially, it will make money from the increase in value of the call options it buys, and that will offset the losses it experiences on the call options it has sold.

Sound complex? It is, and it isn’t the only problem with the fund. This is not an investment that you should own unless you have a very good understanding of options and the option strategy of the Yieldmax NVDA ETF. You need to spend a lot of time reading through the prospectus, something that, unfortunately, many investors don’t bother doing. The only investors that should be buying this are people who would use this strategy themselves (perhaps because they own Nvidia stock) if they had the time, but they prefer to pay someone else to do it for them.

Here are some more problems to consider: Volatility is often a good thing for options traders because it creates the opportunity to buy and sell at advantageous prices. So Nvidia has been a pretty attractive stock to use for this approach (there are other YieldMax ETFs that use different stocks). However, that volatility will flow through to the income the ETF actually generates because some months will be better than others for executing the strategy. To give an idea of this, just look at the $1.2512 per share in dividends paid in August 2024 and compare it to the $2.4707 paid in July 2024. You will not get a consistent income stream here, which will likely turn off income investors trying to live off of their dividend payments.

Part of the problem is that Nvidia’s stock has taken on fad status and can be very volatile. This adds to the risk equation because Wall Street fads often come to painful ends. And here’s an interesting thing: If demand for the ETF falls too low, the sponsor will probably just close the fund. So you may end up having taken on a risky investment approach to generate income only to have that income vanish with no chance of recovery. Oh, and as noted by the sponsor, “The Fund’s strategy is subject to all potential losses if NVDA shares decrease in value…” To put that a different way, before the ETF is shut down, you might have to endure a material capital loss.

The risks outweigh the rewards 

The Yieldmax NVDA Option Income Strategy ETF does something that is highly specific and, frankly, won’t produce a steady income stream for investors. Most dividend investors, and particularly conservative ones, will be better off avoiding it. The huge yield may be enticing, but the risks associated with that yield are just too great. This is a specialized ETF for a specialized clientele.